How Do Insurance Companies Make Money and How Do They Work
1 Minute Read - How Do Insurance Companies Make Money and How Do They Work
- Insurance fundamentally involves a group of people or companies or Bonds agreeing to share risks.
- Customers who buy an insurance for a car, they protect themselves from any damages and accidental financial loses.
- Major forms of insurance are life, health, home and auto and we have many more.
- When you buy insurance, you join others who pay money to an insurance company. The insurance company uses the money collected to pay claims that are submitted by those who have purchased insurance. The money is “pooled” and losses and expenses are shared. An important aspect is the members of a pool share similar risk characteristics.
- The policy is a legal contract, It covers what you are buying, it lists what is covered and what is not, It lets you know how much you must pay (the premium) and when it must be paid.
- Insurance companies do three things with the premium dollar.
- First, they pool the money to pay claims.
- Second, insurance companies pay for expenses involved in selling and providing insurance protection.
- Third, insurance companies invest money.
- The overall cost of underwriting operations in 2006 was 86 cents for every $1 dollar in premium collected. Underwriting operations include claims and associated expenses, costs involved in sales and administration, dividends to policyholders, state taxes and licensing fees, but exclude investment income.
- Understanding Insurance rates is a complex process, Insurance can’t be priced like most products, since the money people pay is intended to help cover the costs of unforeseen events, such as auto accidents or fires.
- Insurance fraud cost property/casualty insurance companies about $30 billion a year. When you add other types of insurance the total is closer to $80 billion.
- All legal businesses are subject to government oversight.
- Insurance companies are primarily regulated by state governments.
Source - "The Infographics Show" Youtube Channel.