How insurance companies make money

The insurance sector is a very popular sector in the automotive and housing market whether, in France, the United States, Canada, or even China The system and the objective are the same: to ensure the good as long as possible.

For example: With home insurance or auto insurance, the purpose of insurance is to protect you against losses and problems you might encounter in life.

This requires entering into a contract renewable each year in return.

But then would you tell me how do they get so rich? Imagine, for example, a loss of an entire building linked to an involuntary fire or even linked to an earthquake, wouldn’t that be several million dollars to be reimbursed to these customers who have taken out home insurance?

The answer is yes… but be careful, you must read the clauses of your contract before signing!

Another question: how then do these insurances continue to exist if in a single loss it must leave so much money? We try to find the answer to this question together with Bestcarinsurancewsa – the leader in the car insurance online market. 

The answer is simple, in general, it calculates the probability of a danger which is attributable to them, and according to the place where you live and its environment are added coefficients to calculate the price that you will pay for such surface.

However, the more customers insurance has, the more margins it will gain since the goal is to ensure as many people as possible by doing the following parity calculation (80/20, this of course varies depending on the different insurances):

20% of the profits generated by its customers will reimburse 80% in the event of an accident. (So ​​it’s very profitable!)

The profitability of auto insurance cost and gain

For example, in the context of a fire, the victim will have 5 working days to report to his insurance and must accurately describe the date, the causes of the incident, the damage to his property accompanied by the estimated amount then an expert will be sent to the scene by the insurer to ascertain and assess the damage.

Another example in the context of a burnt car, you will have to file a complaint with the police authorities and send a letter to acknowledge receipt within 5 days to your insurer while clearly specifying the location and circumstances of the fire in your car. The vehicle then the insurer will appoint, at its expense, a professional expert who will fix the amount of damage according to its catalog value plus any deductibles.

Imagine an insurance company that has 100,000 clients and that each pays $1,500 each year (the price which depends on your type of car, your age, etc.), that makes: 150 million dollars

By taking the figures given by the State (for example or others) each year on the roads, they calculate that out of these 100,000 customers, there will be 10% car accidents, 5% burnt cars, 2% damaged cars, etc.

In the end, this amounts to having 5% (or 5000 people) of cars burnt at a cost of 10,000 € pieces 50 million dollars to reimburse, we are still far from the 150 million dollars earned by the insurance company. Of course, on the calculation is missing car accidents or damage, but when we do the total calculation, we see that the insurance company is doing very well.

Understanding the insurance mechanism

Insurance is based on the notion of risk, which must be assessed using mathematical and statistical techniques.

The insurance operation

Insurance is a mechanism for sharing risks so that they compensate each other. This is called the principle of risk pooling.

However, so that the entire system is not endangered, the risks integrated into the mutual fund must be:

Homogeneous: a large number of risks of the same nature must be combined, which have the same chances of materializing and which will result in disbursements of the same order;

Scattered: we must avoid grouping the risks that are likely to occur at the same time and in the same place: in this case, compensation could not take place. If all farmers in the same region are insured against hail, the slightest hailstorm can wipe out the crops of all policyholders and have catastrophic consequences for the insurer.

Divided: A single claim must not threaten mutuality.

The use of statistics and the calculation of the contribution

They are essential for insurance to determine the likelihood of the risk occurring. This probability is called frequency. It is also possible to determine the average cost of a claim.

From these elements, the insurer can then calculate the amount of the amortization payment, that is to say, the average amount necessary to compensate for the risks between them.

Risk division techniques

When a risk is too great to be borne by the insurer alone (industrial risks, refineries, etc.), the latter uses two risk division techniques that can be implemented at the same time: co-insurance and reinsurance.

Co-insurance consists of a proportional sharing of the same risk between several insurers. Reinsurance is an operation whereby an insurance company (the ceding) insures itself with another company (the reinsurer or the transferee) for a portion of the risks it has assumed.

Solvency rules

The regulations impose very strict management rules on insurance companies, guaranteeing policyholders that the insurer will always be able to meet its contractual commitments.

The insurance contract (or policy): the document that binds the insurer and the insured

The insurance contract is based on the reciprocal commitments binding the insurance company and the insured, the characteristics of which are detailed in the contractual documents:

the general conditions are common to all insured persons insured with the same insurance company, for a specific type of contract (multi-risk home, car insurance, etc.). They explain how the contract works and detail all the guarantees; the special conditions personalize the contract and adapt the guarantees to the risk effectively covered.

Although insurance companies make money through “less out and more in”, they also invest in stocks and bonds which make them more money. 

About the author

Tirupati Gumpula

Hi, I'm a Tech Enthusiastic and founder of Popular technology blogsWay to Hunt. & Elite Tricks. Want to promote your brand? Email: [email protected]

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