Question:
How do insurance companies make a profit?
nopers
2006-01-29 17:17:37 UTC
What are the logistics? Also: If they really make a profit then doesn't that mean that we really don't need them? (If you know what I mean)
Seven answers:
cotopaxi
2006-01-29 17:28:00 UTC
Insurance companies are structured like casinos in some ways. They are betting that the incident (death, injury, sickness, etc.) you are insured against will only happen a certain percentage of time, for which the fees they collect will cover the times those incidents do happen.



Just because an individual might not ever need that insurance, well, never collects on it, does not mean that they did not "need" it, but rather they beat the "odds" of having to use it.
OPM
2006-01-30 15:07:27 UTC
Just an additional note, some insurers such as mutuals and fraternals have no shareholders. The policyholders receive the profit either directly at the termination of the policy or indirectly through policy dividends or reduced premiums. They make a profit, but each policyholder in a mutual or fraternal is entitled to the extent they contributed to the firm's profitability.



When you buy insurance you are trading a certain loss (the premium) to give up financial uncertainty over a possible future event. If your homeowner's insurance premium were $500 you are absolutely certain that you have lost that money. It is a guaranteed loss. What you have traded is they assume a risk from you so that you can be certain not to be at risk should a defined event occur. They absorb, for example a $500,000 risk, for the premium. The emotional problem with insurance is you really don't want to win the benefit/cost game. You probably don't want to die, be disabled, have your home destroyed, see your children die, have a terrible disease, or see your car totalled.



Even large scale disasters usually do not put insurers under, except possibly local insurers. The insurance industry can honestly boast that no insured in the United States, since the beginning of the insurance guarantee funds, has ever not received what they were entitled to in their contract.



It is important to read the contract though.



As to do we really need them, yes. Insurance permits investors to take risks on third parties that they could not take if the insurers were not absorbing the uncertainty. The Dow would be at 2000 right now if companies had to absorb all of their internal risks. Bank rates would have to be in the double digits to absorb the event risks that insurers absorb. Imagine the cost of an auto loan if the bank couldn't recover from wrecked vehicles. They would have to charge interest sufficient to cover the risk of a car crash destroying their collateral.
ANSWERMAN
2006-01-30 01:35:00 UTC
Actuaries for Insurance companies calculate how likely it it is for some event to happen. Using these statistics they cna they figure out how much to charge so that they stiil make money on all of their policies. Some policies will have a claim and some will not. Essentially, it is like gambling. Just like the Casino, the house always wins in the long run. While some people will collect more than they paid in premiums, like some of the BlackJack or slot playes will win, most will not.



As a consumer, you have to understand the risk of beeing uninsured vs. the cost of your premium. In some cases you don't get a choice i.e. auto insurance requuired by the government and house insurance required by the bank that holds your mortgage,



In others, say dental insurance , you might decide that since you have never needed any thing other than a cleaning, you will not take the insurance and take the risk that next toime you could need three fillings.
Karus
2006-01-30 01:29:19 UTC
Great question. Insurance companies exist to make a profit. And, if your accident / insurance usage is below average, you wouldn't techincally need them. (Of course, for auto insurance, it's usually mandated by state law, so be sure to follow the law).



Insurance companies make a profit by calculating the expected payouts/claims based on a lot of factors, including history, projections, etc... and then make sure that they charge more than they expect to pay out in premiums. The premiums of course are adjusted for higher risk groups.



In the end, slightly over half the people insured willl pay more to an insurance company than they recieve, and slightly less than half will get more money from the insurance company than they pay in premiums.



Insurance companies, like banks, also invest your premiums to get a better return on your money.



It's a real science, and insurance companies pay huge bucks to the people responsible for setting premiums and writing those alogrithms.
Jerry
2006-01-30 01:27:38 UTC
Well, most of the time you HAVE to use them. When you get a home loan or car loan, the bank MAKES you get insurance because after all, they own the property until you pay it off.



The Insurance companies make money by selling more policies than they pay on. They also make money by investing the payments you make and by lending money too.
2006-01-30 01:24:25 UTC
They make a profit off of the premiums you pay monthly, quarterly, semi-annually or annually.
mister
2006-01-30 01:24:17 UTC
You pay them. How often do you actually use it?


This content was originally posted on Y! Answers, a Q&A website that shut down in 2021.
Loading...