Thursday, October 25, 2007

How do Insurance Companies Make Money?

Have you ever asked this question? If so, it is high time for you to know about the ways and means the insurance company is making money from the clients.

profit for the insurance companies can be shown as follows:

Profit for the firm = Premium received from the insured + Income from the investment made from the premium received - losses incurred [claims settled] - expenses incurred for the establishment of office, salaries etc.


Insurance companies
make money through under writing. This is process in which the insurance company selects the risk that can be covered, and fixing the premium for covering those risks and investing the money received in appropriate business.

The company needs to spend sufficient time, consider wide range of data and possibilities and probabilities. At the end, the insurance company should decide about the premium, which needs to be competitive at the same time profitable to the insurance company.

Estimation of underwriting

The insurance companies
underwriting performance can be measured by their combined ratio. To arrive at the combined ratio the loss ratio needs to be added to the expense ratio.

The loss ratio is nothing but the incurred loss plus loss adjustment expenses divided by the premium received. The expense ratio is nothing but
underwriting expenses divided by premium written.

The combined ratio will give the companies true picture i.e whether it is on profit or loss. If the combined ratio is less than hundred the company is running in profit . if the combined rate is more than hundred then the company is losing.

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