I have been in the insurance industry for 16 years and have seen for myself how profitable the insurance company is. I won’t try to go into the exact details, but I will give you a good idea of how profitable the insurance company can be in the form of an overview.
Insurance is a form of risk management. They are bought to avoid the possibility of a potentially large future loss. To compensate the insurance company for collecting these potential future payments, the insured pays the insurance company a certain amount of money, known as the premium.
In exchange for paying the premium, the insured is given a written document called an insurance policy, outlining what events are covered and what the payment will be to the policyholder if that event actually occurs.
The insurance company collects premiums from a large group of policyholders to cover the few losses they will have to pay. They use historical data to calculate the probability of damage and then charge premiums to cover it while making a profit themselves.
For example, suppose there are 100 homes in a given area that are each worth $100,000. They will have a total value of $10,000,000. According to the history of this neighborhood, two houses are said to burn every year.
Without insurance, every 100 homeowners would have to keep $100,000 in the bank to cover the possibility of burning down and rebuilding the home. With insurance, each homeowner would only have to put $2,000 into an insurance fund to pay for rebuilding the two homes expected to burn down.
Burning 2 homes x $100,000 = $200,000 home rebuilding $200,000 divided by 100 homeowners = $2,000 bonus
Then the $2,000 premium needs to be slightly increased to add a profit margin to the insurance company.
In addition to the internal profit that the insurance company adds to each premium earned, the company will also be subject to the actual experiences of the insured group. If he takes more money in premiums than you pay in claims, he receives what is known as actuarial profit. On the other hand, if she pays more than she got, she suffers an underwriting loss.
One way to see how well an insurance company is doing is to look at its claims ratio. The loss percentage is calculated by adding the losses they had to pay to the cost they actually incurred to pay
Claims and divide this amount by the premiums collected. Less than 100% indicates a win and greater than 100% indicates a loss.
In many cases, if the rate is greater than 100%, the insurance company can still turn a profit. Because there is usually a time period between receiving the premium and paying the claim. During this period, the company can invest the money raised and make a profit from that investment to offset any underwriting losses and can actually make a net profit.
For example, if an insurance company paid 15% more claims and expenses than earned premiums, but made 25% more profit on their investment, it would have made 10% more profit.
So you see, there is more than one way to make a profit for an insurance company to make money. Two main factors in this regard are how well they are able to predict their payments and how well they are able to invest the money raised.