Insurance companies give out huge sums of money, but what’s in it for them? Why are they in a business where they are actually paying you more than you might be paying them? It is a business, after all, so they must be making a profit one way or the other.
The insurance industry has not turned into one of the most lucrative businesses around the world just like that. The ways in which insurance companies work keep getting complex as you dig deeper into them.
How do they generate billions as their annual income with a risk-based business plan? And how do they make money after paying out large sums of insurance benefits? Keep reading to find out how exactly insurance companies make money.
- Life Insurance: it is the insurance that pays the policy holder’s family, or any other designated beneficiaries, after his death or after a certain period of time.
- Health Insurance: it is the insurance that finances a person’s medical and health expenses.
- Property and casualty insurance: it is the type of insurance that is paid in case of loss in property or any damage to the property you own.
- Specialty insurance: this insurance covers the things or risks that are not covered by any other type of insurance policy.
Some companies specialize in one kind of insurance only, while others like Lovelace Insurance Agency provide several types of insurance packages.
Premium income is the income that is generated from selling risk prevention insurances to the insurance policy buyers. It is the money that the insurance companies earn from the insurance fees paid regularly by the policyholders.
There are two methods that insurance companies use to profit from the premium income. These two methods are the major ways through which insurance companies make money.
Underwriting is the process of evaluating and accessing the risk that people bring with them to the insurance company. The insurance companies thoroughly and systematically analyze that degree of risk to decide how much premium or coverage a person is worth.
Only after that does the insurance company establish premiums, amount of loans, and the amount of coverage it is going to give the policyholders. If the risk is too high, the company will not take it and refuse the insurance to avoid the chances of a high payout.
To attain maximum profit from the policies that are sold, underwriters go through and examine a person’s record, health, age, gender, income, and other such data to set an appropriate premium cost that works out in their advantage.
If after calculating all these numbers, the odds do not appear to be in favor of the insurance company, it will either refuse the policy or set the insurance costs in accordance with the risk. That way the insurance companies do not make risky investments rather only take the chance if they find it legitimate.
2. Investment Income
Another way insurance companies generate revenues is by investing premium income. All that money that the policy-holders pay to the company remains as it is until the insurance is claimed by the customers. That is, in case of some property damage or health condition.
This is when investment income comes in. An adequate amount of the premium income is reserved, anticipating the prospect of paying out if insurance claims are made. The remaining income earned by the premium is then invested by the insurance companies to multiply revenues.
The money made through investment income is typically lower than that made through underwriting but the company does profit from it nonetheless. This is because insurance companies do not have to spend money on buying product parts or anything, like a manufacturing company. So, they can invest all the remaining money generated from premium income and make profits.
Investment income can turn out to be a great profit-earning plan for insurance companies. They can invest the premium income right after the policy payments are made by the customers, since the chances of a payout this early are little to none.
However, with investments, the chances of the odds not working out to the advantage of the company are also a possibility. In which case, the insurance companies compensate the loss from their policy prices. They increase the premium costs that are to be paid by the customers and make up for their loss.
There are some major income-generating revenues of Insurance companies. They do bet on risks but invest a lot of time to research and make sure that they can cash in from the risks. The number of policyholders who claim their insurance annually is not even half.
With all the premium payments, insurance companies keep on investing and multiplying their profits. Hence, an industry that generates billions as an annual income.