Insurance companies are ubiquitous in our lives. Whether it's car insurance, health insurance, life insurance, or wealth management insurance, they always seem to want us to buy more policies. So, how do insurance companies actually make money? What are their costs?
Insurance companies' profit mechanisms primarily rely on their core business model and financial management strategies, which can be summarized as follows:
Underwriting Profit
- Premium Income
Insurance companies generate funds by collecting premiums from policyholders. Premiums are calculated based on risk assessment and actuarial principles, aiming to cover potential claims costs and generate a profit. This is an insurance company's most fundamental source of income.
- Claims Expense Control
Insurance companies use sophisticated risk assessments and pricing strategies to ensure that premiums collected cover expected claims expenses. Simultaneously, optimizing the claims process and strengthening anti-fraud measures are key to reducing claims costs.
- Expense Management
Insurance companies have operating costs, such as employee salaries and office space rental. By improving operational efficiency and adopting advanced technology, insurance companies can effectively reduce these expenses, thereby increasing underwriting profits. 4. Underwriting Profit Formula
Underwriting profit = earned premiums - claims paid - expenses paid. When earned premiums exceed the sum of claims paid and expenses paid, the insurance company realizes an underwriting profit.
Investment Income
- Use of Insurance Funds
Insurance companies invest the premiums they collect to generate additional returns. These funds are generally stable over the long term and suitable for a variety of investment activities.
- Diversified Investment Strategies
To diversify risk and improve overall returns, insurance companies adopt a diversified investment strategy, including investments in stocks, bonds, real estate, infrastructure, and other sectors.
- Long-term and Steady Investment Philosophy
Insurance companies prioritize long-term, stable investment returns over short-term market fluctuations. They develop appropriate investment strategies and asset allocation plans based on their risk tolerance and investment objectives.
Other Income Sources
- Surrender and Lapse Benefits
When a policyholder chooses to surrender their policy, the insurance company may return the remaining premium after deducting a certain percentage of the handling fee, as per the contract terms. Additionally, if the insurance contract lapses for certain reasons, the insurance company may also receive a certain benefit. However, this income is not the primary source of profit and may be accompanied by negative consequences such as customer churn.
- Fee and Commission Income
In some cases, insurance companies collaborate with other financial institutions or agents to sell insurance products, earning fees or commissions from these sales. However, this income represents a relatively small portion of an insurance company's total revenue.
In summary, insurance companies' profit primarily relies on underwriting profits and investment income, supplemented by other revenue streams. Through precise risk assessment, rational capital utilization, and flexible market strategies, insurance companies are able to achieve sustained and steady profit growth.