You may assume that insurance companies make more money than they know what to do with.
In the last few years, insurers have actually paid out more in claims than they’ve taken in in premiums, losing five cents for every dollar taken in. However, insurance companies continue to operate throughout all types of economic climates.
So, how do insurance companies make money?
Risk control
Pooling risk is how insurance companies limit their potential losses.
Every insurance company has a team of underwriters, many of them mathematicians specializing in insurance claims. These teams determine how much insurance premiums should cost. They look at historical trends in your geographic area and demographic, and the type of coverage you are looking for, to determine your insurance premiums.
Your rates for most policies are reviewed annually, and insurers will adjust rates, up or down, depending on the type of risk you are most likely to encounter.
Investing
Investing is the way most insurance companies turn a profit. Large insurance companies have expert investors who put your premium funds into various assets, earning money off the funds while they aren’t being used.
The investments insurance companies lean towards include government bonds and treasury bills, real estate, and a wide range of other options. Insurance companies are risk-adverse by nature, so most of these investments are low-risk, and are positioned to help the company weather financial downturns and unforeseen large losses.
To learn more about your insurance company and make sure you are getting the best bang for your buck, contact the experts at John B. Wright Insurance.
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