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
Insurance companies make money by collecting premiums from policyholders and investing those funds to generate additional income. Here’s a simplified explanation using an example:
Let’s say your insurance policy costs $160 per month, so over a year, you would pay $1,920 in premiums. This money provides the insurance company with a pool of funds to cover potential claims like the $2,000,000 accidents you mentioned.
Now, not all policyholders will have accidents or make claims in a given year. This is where the insurance company’s financial planning and risk assessment come into play. They use complex mathematical models to predict how many claims they will need to pay out and set premiums accordingly. If they collect more in premiums than they pay out in claims and operating expenses, they make a profit.
Additionally, insurance companies often invest the premiums they collect in various financial instruments like stocks, bonds, and real estate to earn a return on their capital. This investment income adds to their profitability.
It’s important to note that insurance companies need to carefully balance collecting enough premiums to cover potential claims while also staying competitive in the market to attract customers. They also need to have enough reserves to pay out claims when needed.
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