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How An Insurance Company Makes Money
 
I worked in the insurance industry for 16 years and saw first hand how profitable an insurance company can be. I will not attempt to go into the nitty gritty details but I will give you a pretty good idea in the form of an overview, how profitable a venture an insurance company can be.

Insurance is a form of risk management. It is purchased to avoid the possibility of a large , potential future loss. To compensate the insurance company for taking on this potential future payout, the insured pays the insurance company a certain sum of money known as the premium. In return for the payment of the premium the insured receives a written document, known as the insurance policy, that lays out what events are being insured and what the payment to the policyholder would be if that event actually occurred.

The insurance company collects the premiums of a large group of insureds to cover the few losses they would have to pay out for.They use historical data to figure the probability of losses and then charge premiums to cover them while building in a profit for themselves.

For example,let’s say there were 100 houses each worth $100,000 in a particular area. They would have a total value of $10,000,000. According to the history of that neighborhood, two houses are expected to burn down during any one year. Without insurance all 100 homeowners would have to keep $100,000 in the bank to cover the possibility of the house burning and needing to rebuild it. With insurance, each homeowner would only need to pay $2,000 into an insurance pool to pay for rebuilding the two houses that are expected to burn down.

2 houses burn x $100,000 = $200,000 for rebuilding the houses $200,000 divided by the 100 homeowners = $2,000 premium

That $2,000 premium will then have to be increased somewhat to add a profit margin for the insurance company.

In addition to the built in profit that the insurance company adds in to each premium it takes in, the company would also be subject to the actual experience of the insured group. If it takes in more money in premiums than it paid out in claims then it receives what is known as an underwriting profit. And, on the other hand if it pays out more than it has taken in then it has an underwriting loss.

One way of looking at how well an insurance company is doing is to look at their loss ratio. The loss ratio is calculated by taking the losses they had to pay out and add to that the expenses they incurred to actual pay out the claims and divide that sum by the premiums taken in. A ratio of less than 100% shows a profit and a ratio greater than 100% indicates a loss.

In many cases if an insurance company’s ratio is greater than 100% they can still be profitable. That is because there is usually a period of time between taking in premiums and paying out claims. During that period of time the company can invest the money taken in and they can earn a profit from that investment to offset any underwriting loss and could actually end up with a net profit. For example, if the insurance company pays out 15% more in claims and expenses than premiums it took in, but made a 25% profit from its investments, then it would have received a 10% profit.

So, as can be seen there is more than one way to skin the profitability cat for an insurance company to make money. Two key factors in that regard are how well they can predict their payouts and how well they can invest the money they take in.

Joe Folger with his extensive experience in the insurance industry is the go to guy for insurance questions. For more insurance company information you can go to http://www.insurancecompanyinfo.com

How An Insurance Company Makes Money by DAVID FORDLEY

Insurance – An Overview

It is true to say that these days you can arrange an insurance policy for almost every eventuality. The most common insurance policies that people take out will include buildings insurance, contents insurance, life assurance and critical illness cover.

Another common insurance policy that many homeowners decide to take out is Mortgage payment protection insurance (MPPI) – this type of policy can cover your mortgage repayments for a period of time in the event of accident, sickness or unemployment.

Buildings Insurance

Every mortgage lender will require you to have a buildings insurance policy in place when taking out a mortgage.

If you own the freehold (the building and the land that it stands on) it is your responsibility to arrange this insurance. If you are a leaseholder then you must make sure that your freeholder has arranged cover on your behalf. It is common for leaseholders to pay out for this policy in there annual management payments to the freeholder.

As long as you have a mortgage on your property then the lender will have an invested interest in it too. The lender will therefore be very keen to make sure that you have your property covered in the event of fire, subsidence or heavy storms.

You may decide to arrange cover independently or through your mortgage lender, either way you may have to provide evidence that you have a sufficient policy in place. Most lenders will not insist that you take out contents cover for your home although this is usually highly recommended.

Contents Insurance

It is very common to arrange a combined buildings and contents insurance policy – most providers will offer to set out a policy in this way. If you ever need to make a claim, you will receive the cost of the replacements for damaged goods from your insurance company – often with an excess although this is agreed before you take the policy out.

An assessment of your possessions must be carried out before applying for contents cover to make sure that you are not underinsured or over insured. Some contents insurance policies will offer new-for-old cover whereas others may offer simply cash – decide which one best suits you before applying. Most people will prefer a new-for-old policy as this will ensure that they receive an exact replacement or even an updated version of the goods lost. In this way you will not have the hassle of shopping around in order to purchase a replacement.

There are certain factors that can reduce a contents insurance premium such as having a burglar alarm in place, having smoke alarms installed and even living in a neighbourhood watch area. There is a wealth of contents insurance providers around, from traditional insurers to banks and supermarkets – always shop around for the best cover.

Mortgage Payment Protection Insurance (MPPI)

Mortgage payment protection insurance can provide cover for your monthly mortgage repayments in the event of accident, sickness or unemployment. MPPI encompasses a combination of insurances however it is possible to arrange solely one type of cover. For example, you may simply wish to take out unemployment cover if you are already covered through work for accident and sickness. .

While about 60 percent of new mortgage borrowers take out MPPI, only one-third of all borrowers have this insurance – this may be due on the main part to the price of the policy itself. As with all other insurance policies, it pays to shop around. There are even some mortgage deals that will have free MPPI included however this will only usually cover you for six months to a year.

Again, with all insurance polices it is important to make regular reviews or your cover in order to make sure that you are not underinsured or that your policy has not expired. Whenever you increase the size of your mortgage by way of a remortgage, you will also need to increase the level of the MPPI to reflect it.

Insurance – An Overview / James Copper

James Copper enjoys writing on all areas of personal and commercial finance. He works for Any Loans who specialise in no credit check loans and bad credit loans.