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creating balance between written premium and loss ratio will cause operative profit only.
in general operative profit & investment profit will show company overall profit.
How do insurance companies make their money?
The business of an insurance company is to manage risk. So not all insurance companies’ make big profits but nevertheless few of the biggest insurance companies are multi-billion dollar companies and are constantly growing. Insurance companies make money from two sources:
1) Premiums collected from their customers.
2) Earnings from investing those premiums.
Insurance companies usually charge annual/Half yearly/Quarterly/monthly premium for their services. It’s easy to see how they make money from this. But they also use these premiums to invest in various investment instruments, such as real estate, bonds and money market funds. One example of how insurance companies make money from real estate is by owning skyscrapers in the biggest cities. The company has their name on the building but they also rent out the offices to various businesses, which provides them with a steady stream of rental income. As you can see, insurers don't make much money through premiums but through proper investment.
Most insurers try to price their policies such that the total premiums collected each year are equal to the total amount of claims paid + expenses (we call this the combined ratio = claims + expenses : premium). The business is a loss making if (Combined ratio >1).
How do they ensure annual net profit?
1) Insurance Companies after underwriting the risk do not relax till the policy comes for next renewals. Underwriting is a continuous process, they analytically evaluation and Re-underwrite the risk accepted by conducting risk surveys by their experts. Underwriting and analytic experience allows an insurer to bring solutions, training, and corrective action methodologies that can help dramatically improve risk exposure and increase the return on insurance activities and ensuring net profits. It makes the underwriting process a key component for any successful insurance company. Underwriting is the process of evaluating the risk that each prospective client poses.
2) Claims department also plays a vital role in analyzing the claims data and investigating & rejecting the fraudulent claims which eats up most of the profits.
3) There are actuaries who pore over endless amounts of demographic data to determine if the company should take on the client on and how much they should charge the client to remain profitable. A good underwriting process will allow the insurance company to minimize the amount of money it pays out in losses.
4) As mentioned previously, the job of an insurance company is to manage risk. This is true for a large insurance company as well as an independent agency. But what happens when insurance companies feel they have too much risk? This is where something called reinsurance comes into play, which essentially is insurance for insurance companies.
5) By spreading risks across different institutions, insurance companies are protecting themselves by not letting one small part of their portfolio destroy their finances. Hope, I had answered precisely but covered all the imp points on your both questions.
Thank you , the insurance companies makes money by issuing insurance policies for a various types of insurance to their customers whom they called the insureds and collects from them a corresponding insurance premiums which devoted together with it's investment returns to compensate some of the insureds who claims and ask payment due to losses that held covered in the insurance policy
The insurance company to calculate the net technical profit after paying losses to the insureds , then deduct the following :-
1/ the reinsurance costs as agreed .
2/ the management expenses.
Best wishes
INVESTMENT INCOME, Insurance Companies Collect premiums they put that money into an investment pool. They use the premiums collected to fund investments (generally in guaranteed or low-risk securities). When a claim is made money is then taken from that pool and put into a cash account to pay the claim once the adjustment of it is completed.
Let's look at XYZ Mutual for an example.... in 2015 XYZ Mutual collected $ 32,640,000,000 in premiums; they paid $22,794,000,000 in claims, $4,311,000,000 in claims expenses, $7,527,000,000 in administrative/service expenses; resulting in a LOSS of $1,993,000,000 on underwriting; however, they had investment income of $2.,901,000,000. So while they actually lost $1.9 Billion on premiums vs. claims and expenses (combined ration of 1.06) they made $2.9 Billion on investment income. As you can see, insurers don't make money through premiums but through investment.
