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How does Insurance Company Make Money

All insurance companies make money. Whether they are providing the service of life insurance or physical asset insurance, all are earning money without facing any loss. All these companies make money by good estimation and management of future risk. 
Now let me explain 

Suppose, you have bought your new vehicle (Bike, Car or any other) . You will just go to insurance company for paying its annual premium. Insurance company will calculate the premium of motor insurance policy. For 100 CC to 150 CC, it is 1.25% of total value of bike. If there is big vehicle with more than 150 CC, premium rate is 1.32% of total value of vehicle. This is the basic premium. For calculating 1.25% or 1.32% risk covering rate, they have to do work hard through statistics. Different statistics tool like probability analysis and other trend analysis will tell them the total accident, theft or any mis-happening with the bike out of total bikes in any time period. There estimation correctness is more than 80 to 85%. Now, they add third party insurance premium. It is also on the estimation of total claim, they have covered in past. Now, total amount will take in the form of premium. This premium is their source of income. After deducting all the payouts in different claims, they get net profit. 

Now, suppose, a person pays Rs. 1000 for the insurance of his vehicle for one years. Suppose, in accident, it becomes scrape, at that time insurance company has paid the claim of Rs. 1,00,000. Now, insurance company is in the loss. But it is just myth. Because, insurance company will never provide service to one person. They already estimate total accidents or claims out of total insurance policy holders on this basis they fix their premium which is sufficient for covering loss and earning the profit in this business

Investment of Premium 

After calculating the reserve for claim, insurance company invest their money in high return portfolio. All these companies appoint the expert officers who has big knowledge in investment analysis, money market, stock market and other finance market. They give the high return on this investment. On this basis, insurance company makes money.  




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Accounting Education: How does Insurance Company Make Money
How does Insurance Company Make Money
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Accounting Education
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