My cousin and I are going to try to start a business so we needed insurance. The insurance is a 160 something dollars a month and covers 2 1,000,000 dollars accidents. Where do they make there money?
In: Economics
By paying out less money than they take in, they calculate the risk of an accident and how much that will cost and adjust fees accordingly.
They make the money by statistics. They have proffesional statisticians called “actuaries” calculating the chances that you will get into an incident in which they would have to pay out. The more likely they are to pay out the more they ask the individual to pay a month. The majority of insured people never need to use it or only use under what they pay over a lifetime.
Edit:
Think of it like gambling. They’re essentially saying “I bet you 1 million dollars that you will use less than x dollars over your entire life for these incidents. If I win I get to keep that x amount of dollars you pay over your lifetime. If you win I pay up to that 1 million dollars.”
In your example, you’re paying $160 a month right. Well what if nothing happens in that month? Well the company just got $160, for free, for doing nothing. An insurance company makes money when something that is unlikely to happen, doesnt happen, and continues to not happen.
If they’ve got like 550 people paying that $160 a month, and somebody makes a claim once a year that pays out $1 million, they still come out ahead.
Most of the comments here are saying something like “they have experts at calculating the costs before they happen, and ensuring they don’t bring on clients who will cost more than they’ll generate”. This is true. These people are called “actuaries” and they are excellent are predicting risk. But that’s only half the answer. Because insurance companies really on use their actuaries to break even. Their goal is mostly to estimate if you’ll generate a million dollars in costs in your life, that they charge you a monthly fee that will generate a million dollars in fees.
Because the real way insurance companies make money is taking your monthly fee and investing it, mostly into the stock market, and then keeping the profit for themselves. They are also experts at predicting WHEN your costs will happen, and presume that, in the meantime, they can safely invest your cash since you won’t need it yet.
In insurance, this is called “float” and it’s the basis for the business. Most insurance companies make nothing on premiums, and billions on float. Turns out holding your clients money for decades presents a lot of opportunities.
you pay them money to “insure” your stuff. your stuff breaks; you file a claim. they say no. profit.
Insurance works by having a lot of people paying small amount (premiums), and paying out large sums to very small amount of people.
If a lot of people need a payout, then you got a problem. Either the world is ending, or the insurance is going to go bankrupt.
Insurance companies also buy reinsurance policies from other insurance companies in the event that they have to payout large amounts.
Charge more in premiums than they pay in claims. And when that doesn’t work, plead for a bailout from the taxpayers.
By finding every possible way imaginable to not pay out for claims. They vacuum up that premium payment, invest that money to make more money, and pay out the absolute barest minimum when you make a claim, if they cover it at all.
They make money just like casinos, the odds are stacked in their favor. Insurance companies have insane profit margins. Most businesses are lucky to make 10% net profit. Insurance companies easily make 40-60%.
The fundamentals basis of their business is that in most cases, a client will never make a claim. Even if they do, their premiums are calculated to ensure that by the time a client asks for coverage, there’s a good chance they’ve already paid more than they’re getting. How premiums are calculated is a complex subject but they’re trying to price in the realistic possibility of a claim being made and then a huge safety margin for their sake.
As a second line of defense, just so that they’re not relying only on their math, they create a bunch of rules and stipulations for their contracts that can void coverage, and they always try to get away from paying out if they can. They may also deny to insure someone at actual risk of needing coverage, as in the case of health insurance companies not covering conditions you already have when you sign up with them. They’re really scummy companies and fuck many people over daily.
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