How Many Insurance Companies Make Money It's Not What You Think

By Ben Glass, Esquire

Benjamin W. Glass and Associates

. https://www.benglasslaw.com/

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How Many Insurance Companies Make Money It's Not What You Think

Paying insurance premiums is a never-ending pain for all of us. It's like health insurance, or worse, life insurance we hope to never use it. For many, car insurance payments amount to thousands of dollars every single year. Over the course of your lifetime, this will be tens of thousands of dollars for some, these payments will total in excess of $100,000, which begs the question are large insurance companies rolling in money? They absolutely are. The real question is how profitable are insurance companies? The answer is actually much more interesting than it may initially appear.

Back to your policy premiums. You and a whole bunch of other people pay your insurance company monthly, bi-monthly, bi-annually, or in some other arrangement. You do this diligently so as to avoid being uninsured. The insurance company, in turn, provides you a piece of paper with promises. That transaction also leaves the insurance company with a massive amount of cash. Unfortunately, those promises the companies make to their customers cost them lots of money. The single biggest expense for an insurance company is paying claims against policies. Insurance companies are also required by law to set aside a reserve of money. This is to ensure that insurance companies can pay claims when weather disasters happen.

Yes, insurance companies also have to pay normal business expenses to keep the lights on, to keep employees on hand to resolve claims, to keep new business rolling in, and so on and so forth. After all these expenses are totaled up, some insurance companies will make five cents on every dollar they charge in premiums, but many companies won't make a solitary penny on your insurance premiums. That's how you know, after all the bad media they get, that insurance companies are, indeed, good at heart.

Okay, obviously, that's not necessarily the case. Insurance companies actually make much of their money by investing the cash they have on hand. Investors like Warren Buffet need cash to buy stocks. Insurance companies have that cash. That's how the profitable marriage between insurance companies and investments is born. The delay between when claims are made and claims are paid provides companies with a base of money to invest. Yes, there are restrictions on what an insurer can do with that money (typically, for our protection, only low-risk investments), but ultimately it's this process that can provide an insurance company with a strong portion of its profits.