Insurers make profits by betting that there are no specific accidents that force them to pay compensation, such as the sudden death of the insured, the burning of his home or the crash of his precious car entirely in a traffic accident.
Insurance companies' revenues are a prevailing concept: an agreement in which the insurance company undertakes to compensate the insured person - an individual, company or organization - for any loss of estimates, such as accident damage, illness or death in the event of life insurance. Insurance companies receive periodic payments from their customers - insured - for insurance policies covering life, home, car, travel, business, precious property and other capabilities.
These undertakings are expressly stated in the insurance contract signed by the parties: the insurance company and the insured.
But when we focus more on understanding how to earn profits in insurers, in the sense of earning revenue in excess of your compensation, things get more complicated. Here, we should examine how exactly companies earn profits? How has its risk-dependent revenues proved profitable over the years?
How do insurance companies make profits?
Insurance companies are profitable enterprises; So it has to build an internal business model that generates cash revenue that exceeds what the company pays to its customers, taking into account the costs associated with its operational activities. To achieve this, companies rely on two key pillars of the business model: Subscription and Income from investment.
Subscription:
Insurance companies' income comes from subscription by collecting insurance policy premiums from customers minus compensation payments and operating expenses.
Let's say, for example, one company earned $ 5 million in insurance premiums from insured persons in a given year, and let's assume that this company paid $ 4 million for insurance compensation in the same year, which means that the company earned the equivalent of $1 million from the subscription.
Without a doubt, insurance employees strive for financial accounts to work in their favor. For example, the entire life insurance procedure is carefully designed to ensure that a potential customer is eligible for the policy, and the applicant's data is thoroughly checked. Also, a range of important indicators such as state of health, age, income, sex and even the credit past are measured; With the aim of determining the premium price to ensure that the insurance company benefits from the maximum risk.
The importance of the foregoing is that the underwriting business model in insurance companies ensures to a large extent that these companies achieve greater gains by avoiding the payment of compensation to the policies they sell. Companies are therefore working hard to analyze data and algorithms that calculate the risk of having to pay compensation for a specific insurance policy.
If the data shows significant risks, the insured refrain from issuing the policy, or charge a higher price for the insured's protection. In the case of low risk, the company offers the customer's insurance with pleasure and is aware of the minimal risk of paying for this policy.
This distinguishes insurers from other traditional businesses. The automotive manufacturer, for example, is obliged to pay major investments in the development of its product, pays money in advance in order to build a desired vehicle with customers, then sells manufactured cars, only when it begins to recover its investments.
In the case of the insurance company's dependence on the subscription, it does not require any prior investment of the funds. Rather, it pays money only in the event of a claim for compensation.
Income from investment:
Another source of earnings for insurance companies is investment activity. It invests customer premiums in the financial market and increases its revenues. Not having to pay in advance to build its product, such as in the automotive industry or cellphone companies, means accumulating more money that can be added to its investment portfolio and increasing its realized profits.
This process generates a lot of money for companies, by obtaining funds in advance from customers and linking their payments to compensation claims enables them to employ these funds in the financial market.
A question may be asked: What if those investments fail and do not make the required profits?
There is always a way out for insurers to pass on losses to their customers by increasing insurance prices.
It is no wonder, then, that Warren Baftt was able to invest in insurance and was bought by Gico and founded by Berkshire Hathaway Reinsurance Group. He knows the winning bets as soon as he gets his eye on them.
Other profit opportunities for insurance companies:
Customers' liquidation of reimbursable life insurance policies:
Insurance companies invest a section of life insurance policy money and give investment dividends to insured people who may be tempted by large profits to claim their money, even if that means closing their account.
The insurance company is then very happy to meet the customer's request with full knowledge that when paying profits and closing the account it completely disclaims its liability from all of its obligations to the insured and retains all the premiums previously paid, thereby liquidating the policy is an additional source of income for the insurance company.
Expiration of the coverage period:
It happens often that customers cannot renew or keep their insurance effective, which can mean a profitable situation for the insurance company.
The expiration of the insurance period means the expiration of the policy without payment of any compensation by the company, which retains the premiums as a net profit with no prospect of payment of compensation.
This is a gold mine for the company that allows the customer to assume the full risk of keeping the policy effective, and if the insured person lives longer than the policy itself or fails to pay the instalments.
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