How An Insurance Company Makes Money Overview Of The Insurance Industry Insurance Rate Methods

I worked in the insurance industry for 16 years and saw first hand how profitable an insurance company can be. I will not attempt to go into the nitty gritty details but I will give you a pretty good idea in the form of an overview, how profitable a venture an insurance company can be.

Insurance is a form of risk management.

It is purchased to avoid the possibility of a large , potential future loss. To compensate the insurance company for taking on this potential future payout, the insured pays the insurance company a certain sum of money known as the premium. In return for the payment of the premium the insured receives a written document, known as the insurance policy, that lays out what events are being insured and what the payment to the policyholder would be if that event actually occurred.

The insurance company collects the premiums of a large group of insureds to cover the few losses they would have to pay out for.They use historical data to figure the probability of losses and then charge premiums to cover them while building in a profit for themselves.

For example,let’s say there were 100 houses each worth $100,000 in a particular area. They would have a total value of $10,000,000. According to the history of that neighborhood, two houses are expected to burn down during any one year. Without insurance all 100 homeowners would have to keep $100,000 in the bank to cover the possibility of the house burning and needing to rebuild it. With insurance, each homeowner would only need to pay $2,000 into an insurance pool to pay for rebuilding the two houses that are expected to burn down.

2 houses burn x $100,000 = $200,000 for rebuilding the houses $200,000 divided by the 100 homeowners = $2,000 premium

That $2,000 premium will then have to be increased somewhat to add a profit margin for the insurance company.

In addition to the built in profit that the insurance company adds in to each premium it takes in, the company would also be subject to the actual experience of the insured group. If it takes in more money in premiums than it paid out in claims then it receives what is known as an underwriting profit. And, on the other hand if it pays out more than it has taken in then it has an underwriting loss.

One way of looking at how well an insurance company is doing is to look at their loss ratio. The loss ratio is calculated by taking the losses they had to pay out and add to that the expenses they incurred to actual pay out the

claims and divide that sum by the premiums taken in. A ratio of less than 100% shows a profit and a ratio greater than 100% indicates a loss.

In many cases if an insurance company’s ratio is greater than 100% they can still be profitable. That is because there is usually a period of time between taking in premiums and paying out claims. During that period of time the company can invest the money taken in and they can earn a profit from that investment to offset any underwriting loss and could actually end up with a net profit. For example, if the insurance company pays out 15% more in claims and expenses than premiums it took in, but made a 25% profit from its investments, then it would have received a 10% profit.

So, as can be seen there is more than one way to skin the profitability cat for an insurance company to make money. Two key factors in that regard are how well they can predict their payouts and how well they can invest the money they take in.

If you own any form of property, whether is on wheels or a house, it’s wise to insure it as who knows what may happen. Finish work and find your car smashed into in the car park or even get home and find your house is flooded through these are both causes for claims and without insurance you are looking at paying for it yourself.

Car Insurance

If you own a car, insurance is not just an option, it is a legal necessity. And you wouldn’t want it any other way. If you are involved in an accident or have your car stolen, owning the right kind of motor insurance can help to ease a difficult situation.

Car insurance protects you against financial loss if you have an accident. It is a contract between you and the insurance company. You agree to pay the premium and the insurance company agrees to pay your losses as defined in your policy.

Car insurance is the probably the most costly side of owning a car, which sometimes can even be as expensive as servicing, repairs and MOT’s and road tax, especially if you’re a younger a driver or those of you who find it difficult to get a cheaper quote.

There are 3 types of insurance available to you when coming to insure your car:-

Third Party – This is more than likely the cheapest you can buy and the simplest option; it is a requirement by law for any vehicle on the road. In short this policy means that if you cause an accident, any damage caused to someone else’s vehicle will be paid for and they won’t be left out of pocket.

With third party insurance, damage to your own car will not be covered, neither will you be in a position to claim if your vehicle is stolen.

Third Party, Fire and Theft – This is one step up from your “third party insurance” As well as covering damage to another vehicle you are also covered on your own vehicle if It is covered against theft or damage caused by fire.

Comprehensive Insurance – This is a bit more expensive than the other two insurances as it will cover both your own accident faults and those of others. Also you are covered for damages caused by someone else if that person’s insurance cannot be claimed on like a hit and run accident.

Using a broker like Isure insurance is a great way to find good quality car insurance at good prices also it saves you time searching for the right company, one form filled in or one conversation and its all done for you.

Bike Insurance

Bike Insurance should be thought of as priority, its doesn’t need to be made out to be as hard as it is though. The key part you need to be aware of is that riding a bike without the right insurance is against the law.

.With so much traffic on the roads nowadays, and the amount of traffic problems experienced on the roads, Bike Insurance is a must. As a consumer you are entitled to know everything about the insurance policy and where to get one from. This information should allow you to locate a underwriter or a broker like Isure Insurance who can assist you in finding the best coverage for your Bike Insurance.

More and more people are tending to use Insurance Brokers like to help them find the best insurers or underwriters to suit their needs. There is however, no such thing as a perfect insurance company for your bike.

Van Insurance

Like Car Insurance, Van Insurance can vary as it does have to consider many rating factors before you get a Van Insurance price. Vehicle weight is an important rating factor, small van insurance will be cheaper than transit van insurance this is because the smaller vans are easier to control and so fewer accidents occur in these.

Other rating factors are similar to those of cars, those who live in cities are thought to be more likely to have a accident, as they will be around more hazards; therefore it is quite normal for someone who lives in a city to have a higher quotation than someone living in a rural location.

Age as always is a factor within getting insurance younger persons will be thought of as a higher risk due to less driving experiences, it’s not always just the age that’s taken into consideration but the age of the vehicle as well.

Home Insurance

Your contents insurance or buildings insurance is there to protect your property and your possessions.

There are a few things within our household that are more valuable than our home and our personal possessions. Home can be not only the most valued commodity in our lives but the content is as well in sentimental value as well as cost.

Although home insurance is not a legal requirement its one that we should all consider as is our home really worth the risk? In the UK alone 1 in 3 people get burgled once in their life time. And at least a quarter of homes are not covered by any home insurance.

But its not only being burgled that is a threat to our homes and possessions but nature itself like floods, high winds and storms, and accidents like fires and spillages that could have a high priced affect to fix.

Most insurance companies today give discount to those who take both buildings and contents insurance with the same Insurer. Best idea is go to insurance and shop around for the best quote you can find.

The price of insurance depends ultimately on the risk the insurer is taking on on behalf of the customer. Simply put, this will depend on the chance of the insured event occurring, and the likely cost of the outcome. The way insurers calculate this risk, and quantify the amount of the premium, is through the use of what is known as actuarial science. Using certain probability and statistical mathematical models, the insurance company can predict with a fair degree of accuracy, the approximate cost of future claims.

For example, supposing a someone wishes to insure their $100,000 home against fire. For argument’s sake, lets assume that 1 in a 1000 homes in this area burn down every year. This would mean that just to break even, on the mathematical model, the insurance company would have to charge $100 a year for the premium. What the insurance company will in fact do is charge something more than $100, say $120. This extra $20 will cover the overhead costs of the insurance company’s operation. It will also cover an amount for profit of the insurance company. The only other way the insurance company generates profits is by investing all the policy premiums it is paid. That way, all the premiums earn interest, or investment returns, while they are in the possession of the insurance company. While this method represents a significant income for the insurance company, the majority of insurance company’s funds do actually come from the payment of premiums.

It has been argued that those who pay premiums and do not have to make a claim lose out by effectively wasting their unused premium. In this sense, the insurance industry can not be held to produce any net gain for society, and therefore, the huge profits they generate are unwarranted. Defenders of insurance companies however claim that the peace of mind they offer to all their customers is a significant societal benefit which they provide. Simply knowing that you will be compensated if disaster strikes you is worth something to people, even if the disaster never strikes.

The funds the insurance company holds, from premiums that have not been claimed for payouts, is called its float. Massive profits can be generated from the float alone. While losses are just as possible as gains with all investments, the profits made from insurance company floats, for the five years ending 2003, was $68.4 billion. In the same period, insurance companies paid out $142.3 billion in insurance claims. Some do not believe that the insurance industry will be able to sustain itself for ever on profits generated by the float and so predict large premium rises for the future.

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