How Does an Insurance Company Make Money?

In the USA, Insurance Companies are regulated by the respective States. It regulates and monitors the activities of all the insurance companies that lie in that particular state’s jurisdiction.

Gradually the influence is shifting to a federal regulatory body. An insurance company agrees to bears the risk in whole or part for the policy holder for his/her financial loss. These companies have various policyholder from life insurance to non-life insurance categories.

The policyholders pay a fixed amount annually, which is predefined at the time of taking the policy, till the year it is promised to reach maturity. This fixed amount is called the premium. Failing to pay regular premiums may result in the termination of the insurance. So, the collection of all the premiums from different policyholders facilitates in the company’s operations that are providing claims and compensating for the financial loss. But it is not a direct process where the premiums are collected and stored and used when there is any claim.

These premiums are pooled together to use in multiple ways.

  1. To cover the claims made by the insurer for which the insurance policy was taken in the first place.
  2. To use in its administration and operations and still make a profit.

They invest the money from the premiums into government bonds, stock market, Real Estate, interest-bearing account, and securities all under the guidelines of the state.

Methods of Earning Money for Insurance Companies

  1. Insurance Companies invest the money from the premiums into government bonds, stock market, Real Estate, interest-bearing account and securities all under the guidelines of the States. The investments are made keeping in mind any future claims and ensuring enough surplus. Industry experts say that for every 100 policyholders only 3 makes a claim. Also, insurance companies already make all probable number of cases that could ask for a claim in a given year. So, the interim period between the premium payment to maturity, insurance companies put in money in low-risk investments.
  2. Policy lapse is a free win for the insurance companies. A policy lapse happens when the policy expires before its benefit payout or termination of the policy due to the non-payment of the premium by the policyholders. For Example, In the case of life insurance if the insured live more than the term of the policy then he/she receives no benefit and the policy is said to have lapsed.
  3. Underwriting income is an important way of making money for insurance companies. The difference between the premiums collected from the policyholders and claims given determines the underwriting income. This is why it is important to ascertain the different premium amounts from different people. People who are unhealthy during the time of taking Health insurance is likely to be charged a higher premium than those who are relatively fit. This is called the loading of premium. With the increase in potential risk there is an increase in the premium amount.

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