How Do Insurance Companies Make Money? | The Motley Fool
indemnity companies make money in two independent ways : Charging premiums to the insured and investing the indemnity premium payments. Sounds simple, right ? It both is and is n’t .
The concepts behind how insurers generate their big bucks are straightforward. But the details of how they make money can be more imply. here ‘s what you need to know .
How insurance companies make money
There are several types of insurance :
- Health insurance pays for part or all of individuals’ medical costs.
- Life insurance provides money to one or more designated beneficiaries when the insured person dies.
- Property and casualty insurance pays for damage to cars, homes, and business properties.
- Specialty insurance covers types of risks that other insurers don’t cover and is also known as excess and surplus (E&S) insurance.
- Reinsurance provides insurance for insurance companies to cover losses above certain amounts.
Companies that provide any of these types of policy make money in the same two ways :
Every insurance company makes a significant part of its tax income by underwrite, which is basically charging a fee ( called a premium ) for taking on fiscal risk .
Insurers employ actuaries who use statistics and mathematical models to evaluate the fiscal risks involved in insuring different scenarios. Once the fiscal risks are assessed, specific insurance plans can be created and premiums set for each type of indemnity plan .
For example, actuaries for a place and fatal accident indemnity party consider the probabilities of natural disasters in determining how much money in premiums that homeowners in different geographic regions should pay. Actuaries for animation policy companies might use age, sex, and medical histories to calculate estimated life expectancies to determine how much different customers should pay in premiums .
When a person enrolls in an insurance design, he or she agrees to pay a fit agio to the insurance company in substitute for the insurance company taking on a certain level of risk. With many policy plans, the total of liability that remains the responsibility of the individual is called the deductible sum. Your car insurance company, for exercise, might require you to pay the foremost $ 1,000 of any wrong costs before the policy company is willing to pay anything .
2. Investment income
All of that money in premiums generates a batch of money for policy companies. The companies do n’t have to pay out any money until or unless an indemnity claim is submitted, such as a claim for a hospital visit or price to a home during a crack.
What do insurers do with the much huge sums of cash generated by premium payments ? The companies put some digression in reserve to ensure that they ‘ll have adequate to pay all claims anticipated over the approximate term. But then they invest the rest of the money .
investment income tends to be a bunch smaller than underwrite tax income. many insurers invest relatively conservatively, possibly by investing in bonds or stable blue chip stocks. however, indemnity companies can still significantly pad their circus tent and bottom lines through their investments .
Investing in insurance companies
There are two primary reasons why you might want to consider investing in indemnity stocks. First, indemnity companies can deliver solid long-run returns. Second, the business models of insurers tend to make them resilient during economic downturns .
Of course, some insurance companies are good than others on both of these fronts. Health indemnity elephantine UnitedHealth Group ( NYSE : UNH ), for model, has handily outperformed peculiarity insurance company Markel ( NYSE : MKL ) over the past 10 years. Markel besides fell a lot more than UnitedHealth Group did during the market contraction caused by the COVID-19 pandemic.
indemnity stocks are normally seen as good picks for bourgeois investors. however, even aggressive growth investors might like certain policy stocks. Trupanion ( NASDAQ : TRUP ) specially stands out as a likely choice for growth investors. The party provides medical indemnity for cats and dogs. Its stock has skyrocketed as the north american pet medical insurance market has taken off .
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