How Do Insurance Companies Make Money
How Do Insurance Companies Earn money is a query which has been on my mind
.How do insurance firms make moneyIt's a question on a lot of people's lips : How do insurance corporations make money?
Whenever there's an accident, a theft, a death, an emergency all you appear to hear of is how much the insurer has needed to shell out. So if they are always paying money out, then how do insurance companies earn cash?
Here, I have compiled a list answering the issue of 'how do insurance companies make money', to offer you an idea of the way the insurance industry works and why insurance corporations are so successful.
How Do Insurance Firms Make money
- The Steps concerned :
How do insurance corporations make money Step One : Cost Research. Regardless of what is being insured, if it is a car, a house or alternatively, the insurance company will first appraise how much it will cost to fix the damage.
How do insurance corporations earn cash Step Two : Risk Analysis. The next stage is to work out the likelihood of whether they're going to need to pay out any damages on such an insured item.
How do insurance corporations make money Step Three : Profit Analysis. This stage is crucial in answering the problem of 'how do insurance companies make money'. The insurer will take the cost of potential damages into account, set it against the danger of such damage occurring, and then set an amount that will make them a small % on top.
The way that it works, is that while some buyers who pay their insurance will inevitably lodge a claim, costing the insurance company more than they have paid, there are far more clients who will not.
' How do insurance companies make cash? ' An Example
Ok, so let's assume there are Ten clients who all take out insurance one their cell phone. If the insurance firm has to pay for another one, let us assume it'll cost them $150 dollars. In this example, if the chance of having to replace the customer's cell phone is 10%, it suggests that out of Ten buyers, they have to bring in more than $150 bucks so as to make profit. So, for one year the company may charge each consumer $20 to insure their telephone, implying the company will take $200 in total, with the statistics showing that in that very same year they have got to pay out $150 in damages leaving them with a reasonable profit of $50.
Naturally, this is merely an example, and the facts and figures will alter depending on what kind of product is being insured and how much the damages will cost compared to the chance, but basically, this example outlines the answer to the question of 'how do insurance companies make money' it's all down to probability.
Now, some may say this is simply a big gamble wrapped up in pretty packaging. And to some degree it is but with the level of market analysis open to them and the mark-up they place against the chance, insurance firms always ensure they come out on top.
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