Why is owning an insurance company so profitable?

Why is owning an insurance company so profitable?

Why is owning an insurance company so profitable there are several major different types of insurance offered to consumers among them auto insurance homeowners insurance health insurance and life insurance typically an insurer’s cost structure can be broken down into four components loss payout payment for losses incurred by policyholders loss adjustment

Expenses costs incurred for investigation and settling of claims underwriting expenses costs of acquiring new business and figuring out what to charge operations all other costs necessary to keep the business running overhead typical profit margins of large publicly held insurers as of the 1st of august 2014 are progressive six eighteen percent the hartford financial services group

Three oh three percent allstate six eighty-five percent erie two seventy-seven percent since the profit margins for these popular companies are in the neighborhood of five percent i would not classify these companies as extremely profitable given their size similarly oil companies are often considered extremely profitable but likewise the profit margins are often in the neighborhood of five percent and it is their large size that makes the

Profit appear very large but relative to the size of the business the profits are average the largest insurance companies do take advantage of economies of scale which helps them get to their present size all else being equal a larger insurance company will be able to improve their operations devote more resources into appropriate product pricing acquire more profitable customers and

Reject unprofitable ones have better name recognition and might be able to take advantage of their size to negotiate special rates with service providers lowering their loss payouts some insurance companies might be able to temporarily generate a higher than expected profit in the short term by under pricing their policies and taking on more risk than they can handle an example of this situation would be ensuring homes that are on the ocean in

An area that has a hurricane once every 10 years for nine years the company could generate enormous profits and grow quickly by charging below market rates for hurricane insurance attracting business from the other insurance companies since there would be no claims in those nine years and they would be under funding their reserves their profits might appear to be

Fantastic however by underpricing the risk in this manner during the tenth year when the hurricane hits the company could be forced out of business due to inadequate reserves because the amount of risk was underestimated a similar situation could occur in the case that a company underprices life insurance for young people and does not have to pay out until many years later when people start dying earlier than

Expected costing the insurance company more money due to the risk being underpriced i have been an insurance agent as well as an insurance customer i have seen good and poor companies i have seen life insurance companies ask no medical questions upon purchasing and denying insurance payout upon death finding some medical background excuse from something years earlier as a reason not to pay

Life insurance for a term and disappears life insurance for life until a few months premium not paid i have seen a number of companies change their names addresses ownerships lost to the deceased family i have seen homeowners insurance to rewrite and have every clause in the world to basically deny any liability i have seen employers refuse to administer paperwork for a work related death of an employee

I have seen misleading deck pages not clearly written so they can deny later as stated in their separate fine print pages i have seen legitimate claims with no guidance on how to proceed or what items are covered yes one gets a quick phone answer and claim number as required by law then it all stops i have seen tv ads claiming the insurance company covered backyard bears or swimming dogs

But only because they had not thought to write a clause to deny liability for bears and dogs and i have seen wonderful companies of a neighbor to step in and pay damages for a house next door or pay for every issue possible real or not in a homeowner’s claim i have seen empty highways around the world no car insurance needed but no full refund

Highway from lake california i have seen wonderful advertising for medicare to convert to their wonderful plan then step up in sorry that four thousand dollars pill not covered in a lot more you had no longer covered from what i have seen paid into companies i would say yes very profitable for the company selling the product and if not it who’s cooking the books it isn’t always very profitable

The profitability of an insurance company is largely determined by market conditions investment strategy and to a very minor degree underwriting profit loss if the investment strategy and the market conditions are right then insurers can turn a good profit however since they are required to invest in rather secure investment vehicles their actual profit margins are not normally very high

The raw numbers seem very high because large insurers are investing a huge amount of money however if you were to look at the returns for small insurers you would find that their profits seem rather insignificant

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