How Do Insurance Companies Make Money and How Do They Work

 

How Do Insurance Companies Make Money and How Do They Work

This episode is brought to you by Skillshare. Get 2 months of Skillshare FREE and learn new skills using the link in the description. Well some of us might think that nothing is more boring than attending an insurance convention on a wet Tuesday night in Boston. And we may be right, but if we look back to see how the industry got started, it's not as dreary as it might seem at first glance. From flamboyant pirates to the brutal fire that devastated the world's largest city, insurance has had a colorful past. But how do those gray suits that sell insurance actually make money, and how do the inner workings of one of the most complex fiscal models really work? If these questions pique your curiosity, then The. Stay tuned for today's episode of The Infographic Show - Why Do Insurance Companies Make Money and How Do They Work? What is Insurance? Well, insurance is a financial vehicle that helps in spreading risk. By taking a risk from an individual, and by spreading that risk around a community, the individual is able to go about his personal or business life without being tormented by financial ruin. In simple words, let's look at two people. One is named Bob and the other is Jim. Bob tells Jim, I'll give you ten dollars, but if I lose my cell phone, you'll have to buy me a new one. If Jim agrees, then that insurance is right there. Insurance companies make money because they evaluate risk and decide whether it is worth the gamble. Jim believes that Bob will probably not lose his phone and that he will therefore be ten dollars rich. If Jim finds 100 more people who are willing to give him 10 rupees each to cover their phones, he has $1,000. If one of those 100 people loses their phone and Jim pays $100 as compensation, he still has 900 bucks. This insurance idea has been floating around since the ancient Chinese and Babylonians spread their shipping risk. But it wasn't until about the 17th century in London that modern insurance really took off. Merchant sea men and merchants often hung out in coffee shops in the business district of London, and while drinking copious amounts of coffee, the idea of ​​modern-day insurance was born. Lloyds of London, the hub of worldwide insurance, was developed inside one of these coffee houses and here's how it works. First, you have the customer. Say the customer has a ship that he is nervous about losing to pirates offshore, or perhaps the vessel will be destroyed in bad weather. The customer goes to the insurance broker. The broker looks at the ship, or pays someone to look at the ship, and they decide how much that ship is worth. The broker then assesses the risk. He asks the customer where he is going and what goods he will be carrying. With all this information, an insurance policy that he shows to the third person in the chain - the underwriter For a cheap premium, the underwriter may exclude some of the risks. And for a few more bucks, that can involve some additional risk. Now usually a lot of underwriters are contacted, but there will be one principal, and the lead underwriter, like Jim, will normally take the largest proportion of the risk and sign his name on the policy document first.

Who sells the policy to another?

They are known as underwriters, as they are the author of his name under risk on the insurance policy. The lead underwriter makes the key decisions when it comes to accepting the policy, and will be the main person agreeing to any claim on the policy. Once the terms of the policy have been agreed upon, it is made legal, and the customer is happy and the ship sails - but not before paying the insurance premium to the broker, who will take about 10%, and the rest. Pass underwriter. But what if pirates do board the ship, steal the cargo, and burn it at sea? Well, the client (if he is still alive, if not, the client's representative) talk to the insurance broker and the broker will visit with the lead underwriter and tell him the bad news. The remaining underwriter (there may well be as much as 20 on a large policy) is called the news and then the broker must negotiate the best claim settlement for the client or his representative. The underwriters pay the money to the broker, who passes it on to the client without deducting any deductions. The broker makes its money once the premium is paid, and will help negotiate the best claim respect and future trading prospects for its clients through gentleness. Now this may not be all bad news for the underwriter. If he is intelligent and not greedy, he may have the policy reinsured. Reinsurance puts the underwriter in the position of the customer. The underwriter sells the policy to another underwriter or firm of underwriters, while retaining a portion of the premium. Confused yet? Think Jim and his phone insurance. If Jim sold his $10 phone policy for $9 instead of the 10 he received, then he gets to keep a dollar for each of his 100 customers, which means he has $100 altogether. risk free. Similarly, modernMost of the time the beam that flows through Lloyd's of London is reinsured out of the building by small insurance companies around the world. So what begins as a simple agreement between the client and the broker (or Jim and Bob) is spread across a trading community that stands to profit from each premium or take and deduction of any losses. This is how insurance works - by spreading the risk to communities. Thus was born marine insurance. It was developed through the need for ship-owners to advance in trade should they lose everything while at sea. But what about property insurance? Around the same time, 1666, the Great London Fire devastated the city where modern day insurance was born, and the renowned architect Sir Christopher Wren, in his Great London redevelopment project in 1667, ensured an insurance in his new plan. Include Office.

Now property insurance has become common for most homeowners who have a policy. As well as medical, life, travel, car and dental insurance are all commonly held policies. Even pet insurance is a major insurance business nowadays. The business model has evolved over time. Modern-day insurance companies are fiercely competitive, which is good for you, the customer, since policies are priced at their lowest possible point. Companies now seem to be writing as many policies as possible to create a financial pool. They charge premiums from thousands of policies, and invest that money in another financial product. Therefore the insurance underwriter may pay more for claims than they make in policy premiums. But they have invested all those premiums in a high interest investment plan, so they make their money out of the basic insurance product. Insurance in this example is one way to make cash flows used in investments more attractive. And if you're wondering what other creative and lucrative ways to make more cash, read "How." Take a Skillshare class called To Generate Passive Income. Skillshare is an online learning community with over 20,000 classes in management, marketing, UI/UX design, and more. If you use our promo code infographics9, you will get 2 months of premium membership completely free of charge! Premium Membership gives you unlimited access to all classes available on Skillshare! Join the millions of others who are already members and support infographics. At the same time, visit Skillshare.com/show infographics9 or click the link in the description, and start learning today! so what do you think? Do you have insurance to protect against the unexpected? Do insurance companies charge too much? Is this all just a scam? Let us know your thoughts in the comments! Also, be sure to check out our other video called US Teachers vs UK Teachers! Thanks for watching, and, as always, don't forget to like, share and subscribe. See you again!