How insurance companies make money

So you think you know how insurance companies make money? Guess again. Most companies do not make a profit on the premiums they get from you, in fact many have an operating loss. Its all about something called the ‘combined ratio’. This is a measure of profitability from the core business. Many insurance companies have combined ratios of greater than 1.00, (1.07 for example) which means they in theory are paying out more than they earn.

The way insurance companies make money is this, they have a large pool of investment assets. These assets are held in case of a payout. They are from your premiums and kept safe by the insurance company’s investment manager. Further they are highly regulated by state insurance commissions. Take White Mountains insurance group, they control, 12 billion dollars of assets, and if invested properly they can lose on their P&C business if they want but the interest, dividends and capital gains from these investment assets, which are really in a sense a leveraged load from the policy holders, are more then enough to make the owners rich. So Insurance companies make money by taking your premiums and investing it, not from collecting more than they payout.

Tags: Insurance, investments