There are many people that may wonder how an insurance company makes its money. It has to pay out when claims are made and this could be a lot of money such as the value of a home mortgage for a life insurance, a rebuild home value if it burns down or replacing cars and paying compensation in cases of car accidents. There are several ways that insurers make sure that they still make a profit.
When they charge people premium, they look at the risk they think that particular person poses and charge accordingly. This means that they will charge them a premium they think will cover any costs they feel that person will bring. This is why if you have an expensive car you will have a higher car insurance premium than if you have a cheap one. It will cost more for the insurance company to replace the expensive one. However, it is not just cost they will look at. They will also consider whether there is more likely to be a theft perhaps your car being stolen or things being taken from your home, depending on the type of insurance. There are many other risks depending on type of insurance that they will consider too such as whether you smoke, the area you live in and whether it has a high crime figure or is at risk of flooding, your age etc. Some specialist insurances will have different risk factors, such as pet insurance which will obviously consider the age and breed of the animal. Insurance companies these days have a computer program which will calculate the risk for them.
Other Ways they Make Money
So basically the insurance company will do its best to charge each customer enough money so that those funds will cover the costs of the claims that they have to pay out for. There are some special circumstances though where they can get extra help with covering those costs. Firstly, there are some government funds that they may be able to use such as a flood fun, which all companies pay into and then can draw from if they need to pay out for flood damage. There are also re-insurance companies which insurance companies use to insure themselves against loss in case they have to pay out more than they have calculated they will need to.
By knowing this, it helps those using insurance understand that they should lower their risk if they want to get a cheaper premium. Obviously you can also compare prices and choose the cheapest insurer but it is also worth thinking about what else you can do. Obviously you cannot make yourself any younger, but giving up smoking, having a cheaper car or home, or thinking about the location when buying a new home could all help your premiums to be lower.