How insurance companies make money

The term ‘insurance’ covers a huge range of different products. There are significant differences between many insurance policies, but there are also certain core similarities in the way that all of these products work. To continue to function, insurance companies must make a profit. This is an obvious truth from the point of view of the owner or shareholders, but it is also important for customers, as the company must remain operational to be able to meet the obligations set out in the insurance policies sold. Here is a brief overview of how insurance providers like Santander make money.
The most obvious source of revenue for insurance companies comes through the premiums charged to customers. Determining the price of these premiums is a highly complex business. On one hand, the behaviour of competitors in the market has an impact on the amount that can be charged in insurance premiums if the company is to remain viable. Set against the pressure of competition are the sophisticated calculations and theoretical models that actuaries use to predict risk. Large scale statistical analysis reveals general trends which form the basis of individual risk profiles. The insurance company will gather as much information about your lifestyle and habits as possible to most accurately match you to a risk profile, which then determines the cost of insurance premiums.
Shared risk is the name of the game when it comes to trend analysis. Exactly when an insurable event is going to occur to a given individual is near on impossible to predict. However, by looking at the effect of certain risk factors on a large sample of people, insurance companies have a far better chance of determining the probable level of claims in a year. When the risk of claims is shared between a large enough group of customers, trend analysis can provide increasing accuracy when it comes to predicting the overall incidence of claims.
Claims produce expense for the insurance company. Ensuring access to sufficient funds to be able to meet the cost of claims is essential. To ensure that such reserves are in place, most insurance companies invest the premiums collected from customers to produce growth. This success of this investment activity is very important for the bottom line of the insurance company, and also has a knock on effect for policy holders. Indeed, the success of some hybrid insurance policies, like endowment life cover, hinges on the prowess of the investment fund managers that work for the insurer. Poor performance of investment funds has a negative impact for both provider and customer.
The rejection of certain high risk potential customers is vital to the continued profitability of the insurance company. Who is offered medical cover, for example, and who is rejected when applying for this insurance, is again determined by risk assessment. In general, it is usually possible to find insurance from a specialist provider even when you are in a high risk category, but you will have to pay handsomely for the privilege.