HOW INSURANCE COMPANIES MAKE MONEY
- By underwriting:- the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks
- By investing the premiums they collect from insured parties
- By using actuarial science:- actually this is not the way of making money, this is used to minimize expenses and maximize profit by using statistics and probability to approximate the rate of future claims based on a given risk
- the business model of insurance companies is to collect more in premium and investment income that is paid out in losses and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation:
Profit = earned premium + investment income - incurred loss - underwriting expenses
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