How do insurance companies make profits?

For example, a large number of scattered homeowners bought insurance and paid insurance premiums to insurance companies. In the event of an insurance accident, the insurer will perform the insurance liability according to the insurance clauses. For some policyholders, the insurance premium they get because of the insurance accident is much higher than the insurance premium they pay, while others may not get compensation at all because there is no insurance accident during the whole insurance period. Generally speaking, the total compensation paid by insurance companies is less than the premium income they get. The difference between these two forms is cost and profit.

From the time when the insurance company receives the insurance money to the time when the insurance company pays the indemnity, the insurance company can invest the insurance funds and earn income. The return on investment is an important source of profits for insurance companies. It can be said that for most insurance companies, the return on investment is the only source of profit. For example, if the indemnity that the insurance company has to pay exceeds 10% of the premium income, and the return that the insurance company gets through investment is 20% of the premium income, then the insurance company will get a profit of 10%. However, because many insurance companies think that investing in risk-free treasury bonds or other low-risk and low-return investment projects is a prudent choice, it is very important to control the percentage of indemnity expenditure exceeding insurance premium income below the investment return rate, because then insurance companies will not lose money.

It is very rare to make money by underwriting. In the United States, the insurance business of property insurance companies lost $654.38+042.3 billion in the five years before 2003. However, the total profit during this period was $68.4 billion, which was due to the investment income. Some people in the insurance industry pointed out that insurance companies cannot always rely on investment income instead of insurance business income.

In China, the main profit source of life insurance industry is personal accident insurance business with one year or less. Life insurance companies often realize this by controlling the payout ratio of their branches. Although investment income is one of the profit sources of life insurance industry, the investment channels are not very wide, and the financial environment, especially the investment field, is not very standardized, so the contribution of investment income to profits is not very considerable.

In China, the cost of life insurance is mainly realized through long-term life insurance.

In the insurance industry, life insurance companies can make considerable profits every year.

Long-term life insurance, or savings life insurance, has different insurance income and payment methods from general insurance, so its profit mode is also different from general insurance. In some countries with mature insurance markets, the loss opportunities of life insurance companies are much lower than those of ordinary insurance companies.

The long-term insurance contract is like a lump-sum savings deposit. The contract period between the insurance company and the customer may be as long as 20 years, or it may be until the insured is 60 years old or even 100 years old. Both parties draw up the withdrawal amount due; That is, the amount of life insurance (insured amount). The customer makes contributions on time during the contract period; That is, to pay the premium. The insured amount is generally greater than the total premium, and there is a return income. In fact, its long-term average yield is similar to the bank deposit interest rate. In order to ensure the repayment demand in the future, the insurance company has made a one-time deposit arrangement for customers, and most of the deposits are invested in some long-term bonds.

Although different policyholders have made the same commitment to the insurance company for the payment period, some elderly people are more likely to die before the payment is completed because of the different age and life span of each customer when signing the contract with the insurance company. Therefore, insurance companies will impose more surcharges (that is, higher premiums) on older customers to make up for the possibility of premature death before all deposits (premiums) are collected. Due to the large number of policyholders and the relatively stable mortality rate, it is easier for insurance companies to master relevant data and accurately and fairly calculate the insurance rates of different age groups.

Life insurance companies can accurately grasp the repayment time. Therefore, compared with ordinary insurance companies, they can make adequate insurance rates without taking more risks, and at the same time, they can achieve the expected profits.

Further reading: How to buy insurance, which is good, and teach you how to avoid these "pits" of insurance.