How do insurance companies profit?
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Insurance companies adjust their pricing/models to ensure that, generally, the premiums they collect are greater than the costs incurred by the policies (claims, operating costs etc).
So, to create a simple example, say you insure 1000 $20k cars, on average 10 out of 1000 will get totaled and it’ll cost $50k to administer those policies.
If you were to charge $400 for each of those 1000 cars to be insured, your revenue would be $400k, your claims payouts would be $200k (the 10 totaled cars) and you’d spend another $50k administering the policies, leaving $150k in profit.
Now, I said “generally” in the first paragraph because there are, of course, instances of black swan events that cannot be accounted for through modeling. This is where reinsurance comes in – insurance companies insuring other insurance companies. Since your question wasn’t about reinsurance, I won’t go into the details, but I did at least want to mention it given the context.
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