how insurance companies work ?

how insurance companies work and make money ?

 

Most insurance companies generate revenue in two ways: Charging premiums in exchange for insurance coverage, then reinvesting those premiums into other interests. The major types of insurance are homeowners, automobile, health and life insurance.

The first type of income is called underwriting profit or “underwriting gain” and comes from selling the coverage itself. This is how the insurer covers claims and pays their policyholders’ dividends . This entails identifying and assessing risk and charging an appropriate premium to insure it. With many insurers using credit scoring to assess risk rather than just using driving records, discounts can be offered for taking phone surveys or testing/using antilock brakes (ABS).

It’s important to note that some insurers such as American International Group Inc. have benefited from their own investment income rather than insurance.

 

The second type of revenue is through investments, which may include stocks, bonds or other assets. Insurance companies are required to invest the bulk of their premiums in liquid assets so that they can pay claims even during a financial crisis.

 

All but the smallest insurance companies must be owned by shareholders who expect dividends on their investment. The vast majority of insurance company stock is traded publicly either on the New York Stock Exchange or the American Stock Exchange . A minority of insurance companies are still privately held – if an individual, family or business owns more than 50% of shares in a private company, it becomes exempt from most SEC regulations. This exemption allows older annuity providers who may not be able to meet the filing requirements of public companies.

Most insurance company revenue is derived from investments and underwriting, though at least one analyst suggests that a significant amount of revenue in the United States is also generated through fees for administrative services (70 billion or more).

 

Companies like AAA may sell supplemental insurance alongside car insurance. These products are often bad deals for consumers since they’re overpriced .

 

Insurance companies in most countries operate on “for-profit” basis with shareholders expecting dividends – if not every quarter, then at some regular interval – like American Family Ventures or AIG Financial Distributors Ltd. However, many Asia/Pacific region state owned insurance companies finance their budgets solely through premiums collected without needing to pay out dividends to shareholders since they are owned by state or national governments. This allows them to reinvest in their insurance operations, which in the long run will generate higher premiums than would be possible if they paid dividends.

 

At least one analyst suggests that a significant amount of revenue is also generated through fees for administrative services (70 billion or more). Since insurance companies charge premiums based on risk , it can be argued that this “administrative service” fee is actually just another form of premium . The same argument may also apply to the use of agents and brokers who receive commissions for selling policies directly. However, if agents/brokers purchase insurance themselves – even without the customer knowing – the premium goes towards paying claims than underwriting profits. Therefore, the insurance company’s revenue is not increased by commissions .

The first type of income is called underwriting profit or “underwriting gain” and comes from selling the coverage itself. This is how the insurer covers claims and pays their policyholders’ dividends .

This entails identifying and assessing risk and charging an appropriate premium to insure it. With many insurers using credit scoring to assess risk rather than just using driving records, discounts can be offered for taking phone surveys or testing/using antilock brakes (ABS).

It’s important to note that some insurers such as American International Group Inc. have benefited from their own investment income rather than insurance.

 

The second type of revenue is through investments, which may include stocks, bonds or other assets. Insurance companies are required to invest the bulk of their premiums in liquid assets so that they can pay claims even during a financial crisis.

The third source is administrative services – basically, an insurance company collects premiums for providing its own products . Although some analysts estimate that this could be as much as 70 billion or more .

Some insurance companies have large amounts of revenue through fees for administrative services (e.g., AAA). These types of insurance are often bad deals for consumers since they’re overpriced . Administrative costs aren’t limited to issuing policies and sending out invoices; they also include providing customer service , hiring staff, building agents’ offices , etc. One analyst estimates these costs make up 70% of all insurance industry revenues.

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