Many people don’t understand how insurance companies make money; after all, both the buyer and seller would prefer that the service never be used.
An Insurance Policy Is a Contract
An insurance policy is a contract between the policyholder and the insurance company. The policyholder pays a premium and the insurance company agrees to pay for any covered losses. Sounds simple, right? It’s anything but. Few people understand the fine print on their insurance policy until it’s needed. Insurance policies are not written to benefit policyholders.
How Do Insurance Companies Make Money?
Insurance companies make a profit through managed risk, underwriting income and investment income.
Managed Risk
Insurance companies divide people into groups based on the likelihood of them filing a claim. If someone has accidents, they are “high risk” and will pay a higher premium for auto insurance. If they pay $100,000 to one policyholder, premiums paid by others in the group who filed no claims make up for those payouts.
Of course, they base their numbers upon a certain maximum payout to all policyholders as a group. They negotiate very aggressively to keep down the payout on individual claims so that they don’t pay more than they expect that they will have to in total.
Underwriting Income
Underwriting income is what’s left over when all premiums have been collected and all insurance claims have been paid. They make a profit as long as their underwriters are correct in their estimate of payouts. Insurance adjusters are always under pressure to settle for as little as possible.
Investment Income
Insurance companies are cash cows collecting huge sums that can be invested. The renowned investor, Warren Buffet, started his Berkshire Hathaway Insurance Company as a means to generate vast amounts of investment capital. Insurance companies might sell cheap policies to generate more money to invest, or raise rates because of losses in the stock market.
It’s all a numbers game to insurance companies. If you’ve been injured, you need an experienced personal injury attorney in Murfreesboro, TN to aggressively negotiate on your behalf.
The Law Office of Gritton & Gritton, PLLC represents clients who have been accidentally injured because of someone’s negligence and need help. This personal injury attorney in Murfreesboro, TN has the knowledge and dedication to fight for the compensation you are due. Click here to request a free consultation.
