HOW INSURANCE COMPANY MAKE THEIR MONEY

You may be wondering how insurance companies make their money if they get to restore the insured back to their financial state before damage or loss. Insurance companies are not only transferring risk or sharing risk they also, created a business model that collects more cash than it pays out to customers which consists of underwriting and investment.

Investment

Insurance Companies make money by investing the premium in financial market and remember that premiums are interest free unlike banks that will pay interest for the amount deposited with them therefore when the insurer invests the premium the profit belongs to the insurer.

Underwriting

Here the business model is made in a way the insurance companies collect more than they pay. The underwriting price is the price collected from the insured minus the the amount given to the insured when he/she makes a claim. 

For example, if an insurer is paid five million naira and pays off four million naira in claims that same year, the insurer makes a profit of one million naira.

Other ways insurance companies make money

When the insurance policy lapses, the premium remains with the insurer or insurance company, this is a big cash in for the insurer therefore not all policy holders get to make claim of their money.

Insurance company may also refer to damage or loss to intentional event or carelessness which is known as moral hazards.