How Do Insurance Companies Make Money?

Insurance companies make money by betting on risk – the risk that you won’t die before your time and make the insurer pay out, or the risk your house won’t burn down or your SUV won’t be totaled in a crash.

The concept that drives the insurance company revenue model is a business arrangement with an individual, company or organization where the insurer promises to pay a specific amount of money for a specific asset loss by the insured, usually by damage, illness, or in the case of life insurance, death. ์นด์ง€๋…ธ์‚ฌ์ดํŠธ

In return, the insurance company is paid regular (usually monthly) payments from its customer, for an insurance policy that covers life, home, auto, travel, business, and valuables, among other assets.

Basically, the insurance contract is a promise by the insurance company to pay out for any losses to the insured across a variety of asset spectrums, in exchange for regular, smaller payments made by the insured to the insurance company.

The promise is cemented in an insurance contract, signed by both the insurance company and the insured customer.

That sounds easy enough, right? But when you get down to how insurance companies make money, i.e. earn more revenues than they pay out, things get more complicated.

Let’s clear the air and examine how insurance companies make money, and how and why their risk-based revenue has proven so profitable over the years.

How Insurance Companies Make Money
As an insurance company is a for-profit enterprise, it has to create an internal business model that collects more cash than it pays out to customers, while factoring in the costs of running their business.

To do so, insurance companies build their business model on twin pillars – underwriting and investment income. ์•ˆ์ „ํ•œ์นด์ง€๋…ธ์‚ฌ์ดํŠธ

For insurance companies, underwriting revenues come from the cash collected on insurance policy premiums, minus money paid out on claims and for operating the business.

For instance, let’s say ABC Insurance Corporation earned $5 million from the premiums paid out by customers for their policies in a year’s time. ์นด์ง€๋…ธ์‚ฌ์ดํŠธ ์ถ”์ฒœ

Let’s also say that ABC Insurance Corp. paid $4 million in claims in the same year. That means on the underwriting side, ABC Insurance earned a profit of $1 million ($5 million minus $4 million = $1 million).

Make no mistake, insurance company underwriters go to great lengths to make sure the financial math works in their favor.

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