How do Insurance Companies Make Money?

How do health, car, and life insurance companies make money?

Friends, the Insurance Companies give you protection from loss and in return, they charge you a Premium and we know the premium is very less as compared to the insured amount. So questions would have come into your mind about how Insurance Companies earn profit.

First, quickly let us understand the Types of Insurance:

There are two types of Insurance, the first is life insurance and the other is general insurance. There are many types of life insurance such as term life, money back policy, unit-liked insurance plan, and pension plans. Talking about general insurance, they are also many types like motor insurance, home insurance, health insurance, and fire insurance.

Now all types of insurance we all know that companies charge a small amount of premium from us but in many types of life insurance, you also get your premium back in the last. The amount of this insurance claim is also much more than the premium amount.


So, how do Insurance Companies earn profit?

Insurance companies make a profit in two ways Underwriting and Investments.

What happens in underwriting is, Insurance companies give you protection from losses like motor insurance, home insurance, health insurance, and fire insurance,  in return, they charge you a premium and we know that the premium is significantly less compared to the insured amount.

The insurance company that collects the premium creates a pool of that money and gives money out of it to people who claim Insurance. The premiums are the biggest source for them. But now if we talk about Expenses then the biggest expenses are the claims, and if someone makes an insurance claim that is the biggest expense for them.

So now this company predicts on the basis of historical data & statistical analysis, How many people can claim in the future What is the probability of loss, and how much amount they may have to pay on the claim. They also decide the premium on this basis.

The premium-to-claim ratio is called the loss ratio. So the total amount that they have received from the premium is more than the total claim amount that the company is paying. In this way Insurance Companies majorly earn profit.

Now they make a portfolio of all the premiums received by the insurance company and invest in Financial Markets from there also the company gets good returns and that amount company helps to manage its risk in a good way. If there is no claim so, premium & interest becomes the profit of the company.

Let’s see this whole thing with ease, suppose 500 people got insurance and the premium amount is 2000 rupees, then 500 multiplied by 2000 rupees is 1000000 Rupees which is the premium collected and the insured amount is 100000 Rupees.

Now let’s assume that 9 out of 500 people claim insurance, so the claim expense is 900000 rupees, then the profit from the underwriting is 100000 rupees and  What will be the investment by the company in which we assume that they would have got 12% interest would add to that and makes the profit of 220000.((1000000 * 12/100) + 100000)

We have explained it in a very simple way so that you can understand it easily. But there are things like marketing, agent commissions, operation etc which are expenses to the company.

Looking at today’s environment, it would not be wrong to say this. Insurance companies focus more on earning profit than solving people’s problems. That’s why in many cases the company promotes its policy in this way. The customer does not understand everything properly, yet he is in the grip of the marketing agent. Due to low premium, they take the policy and their claim is rejected at the time of settlement.

By the way, life insurance has become a thing in today’s time. You should also insure yourself as soon as possible to be safe from future uncertainty. But there are many things you should check before taking insurance. Like how is the claim settlement ratio of the company, how is the support system of the company, Which features do you get?etc.



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