Insurance is a fantastic concept that the human race has ever developed over its history that has become a complete life-saver game for the people around the world. In short, insurance is the concept of protecting an individual from monetary loss. It protects people against the possible risks of fire, accident.
What happens is that when a person buys insurance, the insurance company enables the buyer to transfer the cost of potential loss to the company in exchange for a fee which is commonly called a premium. Now the biggest question that arises in the mind of the customer is How Insurance Companies make Profit that they become able to bear the cost of the potential loss of the insured person.
Generally, an insurance company makes a profit with the help of the following two ways of income:
Investment Income
When the insured person pays the premium to the insurance company they further invest the money so that the company accrues interest over time. A part of the profit that the company earns from this investment is used to cover the expense of the insured person, and the remaining part is the profit of the insurance company.
For example, suppose that the insurance collects $30 million from the insured person. Then they will invest the money in an investment pool and if they earn the $40 million from that invest pool they return $35 million to the insured person and the rest $5 million is the profit of the insurance company.
Underwriting Income
It can be defined as the difference in the amount of money that is collected from the insured person as the fee (usually called as premium) and the money that the insurance company pays when the insured person claims his cash at the time of his necessities.
For example, if an insurance company collects $30 million from the insured person over a year and spends $25 million in an insurance claim and its associated expenses, then the underwriting income of the insurance company is $5 million.
This is How Insurance Companies make Profit with the help of underwriting income, investment income or both. So, the customer does not need to worry about how the insurance will make their profit and how they will pay them. The insurance company makes a huge profit and gives its customer only a part of it.
You can read more about how do insurance companies make money Source.
Hi, I’m a Financial Operations Specialist, having an experience of over 12+ years. I have worked with a major financial institution like Goldman Sachs, in their investment management division. During my term with Goldman, I’ve worked on derivatives, hedge funds, futures, etc. I also have experience in manufacturing industries in Credit Risk Analysis and Approval to the clients for prospective businesses with the parent company. I’ve got a financial degree from Vinoba Bhave University.
