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
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.
Latest Answers