Emma Asked: September 29, 20212021-09-29T17:14:47+05:30 2021-09-29T17:14:47+05:30In: Education and learning What is insurance and how does insurance companies work? What is insurance and how does insurance companies work? insurance 1 Answer Voted Oldest Recent rtn 2021-09-29T17:16:01+05:30Added an answer on September 29, 2021 at 5:16 pm Let me first answer what is insurance. It is a contract between you and the insurance company. You are paying them in exchange for financial protection when something happens to your home, car or other belongings. They will give you money if anything bad should happen that would cost more than what you could afford on your own. – Insurance companies work by collecting premiums from their customers every month who have signed up for certain types of insurance policies with them. – The collected premiums are put into reserves which an insurer must maintain in order to pay future claims as they arise because not all people make claims at the same time so there needs be enough capital lying around just in case someone has need it one day. This reserve requirement used to be much higher but was changed recently due to new regulations requiring that insurers hold more assets to be able cover their liabilities. – Insurance companies are only allowed to invest the money that they collect in premiums and not what is left over after claims have been paid, which would change if you had insurance with an investment component (like life insurance). This effectively meant that any excess capital was returned back to policy holders as a bonus or profit sharing scheme. Now let’s explore how insurance companies work. – Insurance companies rely on the premiums that they receive from policyholders for their survival. This money is used to pay claims, cover operating expenses and invest in assets such as stocks or bonds which may generate income over time (known as investment return). – As insurance risk pools get larger, they can negotiate better rates with health care providers because there are more people covered by them who will use those services. Having a large enough pool of individuals also allows insurance companies to spread out any potential losses across a population base making it easier for them manage risks associated with certain types of policies like life insurance – The process behind how an insurer calculates its premium depends entirely on what type of policy you choose: term or whole life etc. There’s no one size fits all answer that can be applied to every insurance policy because each type of coverage has its own unique set of benefits and risks. – The money you paid for your premium is used by the insurer to provide the promised protection in exchange for which they will reimburse you if anything bad should happen. This is why it’s important to read through your policy carefully before signing up so there are no surprises down the road when something happens and a claim needs to be made. – One final thing: Insurance companies make their money by investing premiums received from customers over time (in short, investments). They have been doing this very successfully throughout history as proven by how large most insurance conglomerates have become today. In fact, many people describe insurance companies as “very large, very rich and very patient” which makes them an excellent investment option. – The bottom line: Insurance companies are for profit corporations who work by collecting premiums from customers and investing those funds in order to provide the financial protection promised under their policy. Their goal is not to lose money but rather break even over time with a small margin of safety should anything unexpected happen that would prevent them from meeting their obligations to policyholders down the road. Now you know how insurance companies work! 0 Reply Share Share Share on Facebook Share on Twitter Share on LinkedIn Share on WhatsApp Leave an answerLeave an answerCancel reply Featured image Select file Browse Add a Video to describe the problem better. Video type Youtube Vimeo Dailymotion Facebook Choose from here the video type. Video ID Put Video ID here: https://www.youtube.com/watch?v=sdUUx5FdySs Ex: "sdUUx5FdySs". Answer Anonymously Save my name, email, and website in this browser for the next time I comment. Related Questions Would you rather buy business insurance or go without it? Do you think that restaurants should have some kind of insurance to cover themselves in case someone gets food poisoning ... What is one cost of avoiding health insurance? What are the pros and cons of insurance? What you should consider before getting insurance Why should I get health insurance and what are the importance? What Are The Importance of Auto Insurance: Explain The Facts, The Benefits, and More? How do insurance companies make money?