How Insurance Companies Make Money

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You think about insurance for yourself, family, home, car, scooter, jewelery or anything which you feel is precious for you. But have you ever thought about how these insurance companies who ask you to pay premiums on your insurance amount make money for themselves? Insurance companies have many sources of making money. The way Insurance Companies make money directly influences the capability of an erroneously injured individual to attain reasonable reimbursement for his loss.

Insurance companies make money through

Some of the common ways to understand how Insurance Companies Make Money are:


An insurance firm disburses money as per the guidelines laid by the authorities i.e. when a specific even takes place to the policy holder. In context of the proprietor insurance, the insurance firm may forfeit the money to the holder if a fire takes place. Normally, the utmost sum that the insurance company will forfeit is acknowledged in the policy. These payouts signify expenditures to the insurance firms.


Even though there are disparities between insurance plans and insurance firms, the main principals they undertake to make profit are similar. These firms charge a pre-set premium fee to offer insurance. These premiums are also considered as costs which an individual pay to get insured. Premiums can be forfeited in many ways depending on the kind of insurance and the buyer's inclination. For instance, the premium for an automobile insurance is generally forfeited twice a year. Now due to privatization many insurance firms permit monthly or yearly compensations as well. Hence, the fortification made in the form of premium is a kind of source through which the insurance company makes money.

Shared Risk

If a policy holder forfeits` 700 as premiums in automobile insurance but does not register any case of accident till the validity of the plan, then the insurance company is entitled to keep that amount. In the same manner if policy holder forfeits` 900 as premiums in automobile insurance and has registered a case of accident that results in a damage of` 90,000, then the insurance firm is entitled to forfeit` 90,000 in spite of the fact that the purchaser gave far less. This theory is known as shared risk.

In the instance explained above, if the insurance firms receiv` 700 from 100 clients every year but in turn is not entitled to any claims for every client who has ` 90,000 in claims, the insurance firm would split evenly. However, in practical scenario the functioning of the insurance firm is not so uncomplicated. With lakhs of policy holders under its credit, new statistical trends surface every now and then.


Since claims are not registered on any type of standard schedule, there are probabilities when the firm will have more capital received in the form of reserve that is required to forfeit claims. In context to the instance explained above, if out of 5 individuals 1 register standard claims of ` 5,000 every year then there may be 5 claims of ` 100 each. In this fiscal year, if the insurance firm incurred a profit of ` 5,500 in premium and forfeited only ` 500 as claims, then the additional ` 500 deducted over the desired break even sum is considered a gain.

The remainin` 4,500 will be secured as a "reserve" under the company's account. The amount will not be considered as a profit but will be upheld to meet the expenses in due course of time.

Investing Reserves

An insurance firm invests the additional profits known as reserves rather than bringing down in the savings account. If an encouraging return is incurred from these investments, the capital arrived at would be considered as profit. So, if the firm incurs 15% profit on that extra ` 4,500 much ahead of needing that amount to forfeit claims then it would gain ` 450 just by upholding its reserves.

The grouping of deducting cost-effective premiums in addition to making profit on invested reserves is another way through which an insurance company makes money.

Last Updated on 15-06-2011

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