When I first started my job as an insurance agent, the first thing which comes to my mind was, “how do Insurance Companies make money?”. Believe me; I also had no idea. But with 15 years of experience in one of the most famous insurance company in us now I know how they do they earn money.
How Do Insurance Companies Work?
Insurance companies earn cash using various methods at the expense of the client. Insurance companies take that risk of hoping you won’t die earlier before you pay the full premium, or your vehicle will not be totaled in a crash. So the idea is a pretty simple insurance company makes a deal with a company, group, or person. They guarantee to pay a selected amount of money for selected asset loss by any sickness, injury, loss of life according to their insurance category.
As you know in return insurance company asked the buyer to pay funds for insurance coverage policy that covers auto, travel, home, business, and all other assets. This agreement (Insurance policy) between you and the insurance firm has signed by not only you but also the insurance firm.
So how they make money from this? Look like they have been earning extra money than they are paying to others. Let’s get started before the thing gets complicated about why and how this revenue has proven this profitable through the years.
How Do Insurance Companies Make Money?
Do You Know?
Even for the insurance companies, they need a business plan to increase those collected revenues than it pays to their customers. There are two sources of revenue for insurance companies. However, they usually made their business plan on investment income and underwriting.
1. From Underwriting
The first and most famous source of revenue for insurance companies is Underwriting. Then how do insurance companies make money from underwriting? Underwriting revenue comes from the difference of money collected on and expenses paid out to the customer.
For Example, If my company Stanleyinform paid 10$ million US dollars to my insurance firm in the past year. In the meantime, the insurance firm paid me 4$ million dollars for some accidents. It means my insurance firm had earned revenue of 6$ on underwriting aspect. Wow, something unbelievable, right.
All insurance have their underwriters, and they go as far as they could to ensure the insurance companies financial side work of their favor. To gain maximum benefit, underwriters consider their customers every metric. For instance, things like age, earnings, health, gender, location, credit history, and lot more with every angle to assess the risk of before lending cash for you.
Now you must realize how vital an underwriter for an insurance firm. After analyzing if they decide the risk is very minimum, then they will hand over the policy and make the agreement as soon as possible. If the risk is just too excessive, then the insurance firm may consider charging more than usual before offering the policy or would not offer the plan at all.
Have you ever thought about Insurance companies are as smart as they look? They were counting on underwriters and put no cash upfront only pay when there is a legitimate claim.
2. How Do Insurance Companies Make Money From Invest the Revenue
Yes, to increase their revenue, they invest in that cash, which comes from you every month somewhere in the financial market. (like Wall Street). That sounds pretty good. Doing so, they earn extra more money with ease, and they do it with smart strategy every insurance company makes money this way.
Mr. Warren Buffet, the CEO of Berkshire Hathaway, had invested so much in the insurance side and bought Geico insurance company and opened its own Berkshire Hathaway Reinsurance Group. Wasn’t a surprise that guy was that successful. It’s not always about knowledge people but also about taking a risk and believing about yourself and your knowledge
3. From Cash Surrender Value
Question: How Do Insurance Companies Make Money From Cash Surrender Value?
Answer: Cash surrender value is a form of lifetime life insurance generated using dividends and through insurance company investments. When insurers find out that they have hundreds of dollars from cash surrender value, they need the money as soon as possible. The best thing is about this is insurers don’t care even closing the account.
When this happens, the entire liability ends for the client with the insurance firm. All the premiums client paid will not repay by the insurance firm. They only pay the interest they have earned so far on their investment and keep remaining money.
Cash surrender values payouts are without doubt revenue earn method which all the insurance companies use.
4. From Coverage Lapses
Sometimes we fail to maintain our current insurance policies. According to the policy, if policy expired without claims paid out. However, insurance companies take full benefit from this. Because, there is no way clients pay claim amount, and the entire paid premium amount will not repay. That how do insurance companies make money from covering lapses.
5. From Reinsurance
How do insurance companies make money from reinsurance? For instance, think you have owned an insurance firm close to the seaside area. There is a very slim chance of a tsunami, but who knows, considering such circumstance insurance companies willingly reinsure their company. That will take risk-off, and something happened they could get a payout. Insurance companies do reinsurance to protect themselves and reduce risk.
Now you have learned about how do insurance companies make money. There are tons of sources of revenue for insurance companies. Insurance companies have been made all things in their favor and make a profit from people’s money. They have a clear financial plan, and the profit they earn is significant. Insurance companies will not change ever, and neither we could do a thing about this except being optimistic.
Leave a comment and give your thoughts and read my other articles and find out about insurance and especially Auto insurance, because that’s the area in which I was working for 15 years.