How insurance companies Make Money 2019


If your car crashes, your house burns down, your luggage is lost on your next flight, or you are diagnosed with a serious illness that costs you a lot You dig deeper into your financial resources each time a crisis occurs? What if you don't even have the necessary amount?
it's simple. Get insurance.
What is an insurance?noortime

What is an insurance?

Humanity invented a sort of great concept called insurance on its history, which was an absolute lifesaver for people all over the world. Unless you have lived under a lifetime, you probably know what insurance is. The dictionary defines insurance as-

The arrangement that the company or state, ie the insurer, promises to provide a guarantee of compensation for certain losses, damages, illnesses or deaths of the insured in exchange for payment of certain premiums
Insurance has been around for centuries. Hundreds of years ago, when ships were destroyed and seafarers lost cargo, they came up with the idea that they could also split their risks by dividing the cargo into ships. Total financial thinning was avoided. The same principle applies in this case as well. Thousands of people are paying small sums to cover a fraction of the cost in crisis.

Now, the premium you are paying each year is a small fraction of the total amount insured, so you will be happy to pay it each year. But in order to make any business profitable, the income must be greater than the cost. How is the insurance company operated? How do you earn money if you pay for your insurance company if they are just a small fraction of what you pay for when you submit a claim? How do they do business, and are they making a great profit in that regard?
Let's dive into their business model first to answer these.

Insurance company business model:

The insurance company's business model revolves around risk. Premiums are determined by pricing their risks using advanced algorithms and statistical tools that vary by company and insurance type. Each time the insurer offers a seemingly large amount of conditional payment, the likelihood of the insured's claim for that payment is calculated and extended over the entire premium payment period.

The amount collected as premium from various people is only slightly more than the amount that the insurance company has to pay to some of the people who take out the insurance each year. This is because the majority of the revenue comes from the interest generated by investing premium money in safe short-term assets. This is what makes any insurance company profitable and covers expenses such as fees, salaries, and administrative expenses.

When a customer submits a claim, the authenticity and accuracy of the claim are checked before the payment is made, thus minimizing losses from fraudulent claims. From life to property, to cars and even to travel, everything in the world is insured. The basic business model has hardly changed, but the process of determining premium amounts and terms of payment may be different.

Underwriting income: This is the difference between the amount collected by people as a premium and the amount paid when the claim was made at the required time.

Return on Investment: What you pay as a premium will be invested further, so it will generate interest over time and will be used to cover the various costs of the insurance company. Most insurance companies have diversified portfolios and invest in both low risk fixed income securities and high-risk high return stock markets.
What is an insurance?noortime

Why does the premium vary from person to person?

Premiums vary depending on the individual. Let's explain the reason with a simple example.
Insurance your health, let's say you are a well-healthy individual. Your friend has guaranteed his health from the same insurance company, but he is in full swing alcohol and is in danger of having cirrhosis. The chances of your friend going to the hospital will be much higher than you. As an insurance company, it makes more obvious business sense to claim higher premiums from your friends, as he is more likely to go to the hospital and submit a claim. For everyone we know, those who are right for you may not even need to visit a hospital. So the money the insurance company earned from people like you is spent on people like your friends. As insurance companies assume greater risk, the corresponding premiums also rise. This is also referred to as loading the insurance fee.

Does everyone get insurance when claiming insurance?

If yours is the real case and you have all the necessary documentation and evidence available, the claim is processed without error. Most insurance companies have a bill settlement rate of over 90%. Therefore, an average of 9 out of 10 will tell you the amount of the insured when you claim it. If you lie about your personal and other relevant details while you are applying for insurance, that is a totally different issue. Taking the above example of you and your friend further, let's say your friend does not reveal his alcoholism and liver condition while applying for insurance to avoid paying higher premiums. The insurance company is free to pay nothing to your friends if he finds out later when he charges as needed.

Even if an insurance company pays over 100 to 200 times the premium, you may wonder how to pay it when you claim it. It may seem unbelievable, but since insurance companies reach premiums after careful research and estimates, premiums collected from everyone every year are slightly more than what you have to pay at the time of claim. There will be more. If there are 100 insured people, only 3 will submit claims and the remaining 97 will not. As the insurance industry is running in volume, these odds continue to drive the insurance system well with oil. The extra money left over can be carried forward and used for many years when the bill increases for any reason.

How does an insurance company set premiums on insurance contracts:

The insurer tracks the claims or loss ratio each year. This is the ratio of the total amount paid for claims and other adjustment expenses to the total amount earned for premiums. Future premiums are calculated based on this ratio. The insurer takes into account all expenses, including management costs and fees, and then secures a 2-5% margin.
At the end of the year, the actual payments are compared to the original estimates and the premiums are adjusted in the future.

Here are other factors that are taken into account for some major types of insurance:


  • Life Insurance: A life insurance company estimates the amount it needs to claim as a premium and the number of years to cover the cost of the claim, taking into consideration the average life as an individual.
  • Health Insurance: A health insurance company takes into account information such as an individual's age, past medical records, current status, claims of various medical procedures, related expenses, inflation, etc. to determine premiums.
  • Car Insurance: Car insurance companies consider the age of the car to determine the premium. This information can help determine the car's performance, the frequency with which maintenance is required, and the potential for an accident.

We have seen how beneficial insurance can occur in unexpected adverse conditions. It keeps us free from stress and relaxation, and also provides money to invest in insurance companies and keep the economy going.

At the top of the day, insurance may be a volume game:

Insurance companies operate like casinos and know that they may work in an advantageous manner. Even if there is an overwhelming number of claims in a year, we will balance next year. In the long run, they will make a profit. For you, it would be wise to ensure all the valuable things you own, including your life. You never know when and how life throws you a curve ball. As they say, when life gives you lemons, make lemonade or better, get insured.

I hope you like our best collection of How insurance companies Make Money 2019  helpful.

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