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
If you squint hard enough, insurance companies are basically casinos. You’re making a $160 bet every month, and the prize if you win is up to $1M.
As with casinos, they make their money by setting the odds for their “games” such that they win on average across all players. If they have 600 people paying $160/mo, that’s just shy of $100k/month total. If they average one $1M payout per year, they win $200k. Setting the odds is pretty damn complex work, and they employ [actuaries](https://en.m.wikipedia.org/wiki/Actuary) to manage those numbers.
Obviously, the difference between gambling and insurance is that you don’t really want to win that bet, because it’s tied to a bad thing happening. Instead of being risky behaviour where you’re burning money chasing a big win, you’re paying to control a risk and keep it from bankrupting you.
In America, at least health insurance companies, they’re heavily subsidized by US taxpayers. To the tune of billions and billions of dollars each. For example, UnitedHealth, for which 72+% of their cash is from tax dollars. 1.8 trillion (with a T) in 2023.
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.
Insurance companies primarily generate revenue in two ways:
1) Premiums: They collect premiums, which are fees paid by policyholders for coverage.
2) Investments: They invest the collected premiums to generate additional income. By strategically investing these premiums, insurance companies can grow their profits.
Every month you pay 10, I pay 10, my dog pays 10. One year later, I have a 100,- accident and our insurance covers it.
They received 3 x 10 x 12 = 360,- that year.
They paid 100,- that year.
They keep 260,- that year.
Their challenge is to balance the payouts with attractive pricing and profit.
And yes, that would mean that if everyone had an accident at the same time, they would be in trouble (were they not insured themselves), but that’s not how the odds are stacked: most people most of the time do not have accidents.
> why would I pay their profits!
Because for you to save and never use an emergency fund of 100.000,- for a medical emergency, for example, you’d be dead before having saved it. Instead, you insure yourself for 100,- a month, and together with all the other customers you spread that risk and financial load among yourselves so everyone is safe when push comes to shove — again, which for most people most of the times won’t be necessary.
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