How Insurance Companies Make Money – Everything You Need to Know

When you purchase an insurance policy, you are buying peace of mind that you have an umbrella of financial protection if something catastrophic happens. Insurance companies offer significant policy coverage against personal injury and property loss in exchange for low monthly premiums. This may leave you to wonder how insurance companies can afford to pay claims and still be profitable?

South Carolina personal injury attorneys regularly pursue high dollar awards against insurance companies for their clients and have made it their business to understand exactly how insurance companies make money.  Here is everything you need to know:

3 Ways Insurance Companies Make Money

Listed below are three ways on how insurance companies make money.

1. Underwriting Income

Insurance premiums are based on the risk of paying claims against sold policies. When insurance policies are sold, purchasers pay monthly premiums to the insurer. Greater risk to the insurer results in a higher premium to the insured. The insurance company’s pool of income from collected premiums is used to pay operating expenses, professional fees, and policy claims. 

  • Operating expenses including rent, utilities, employee payroll/benefits, etc.
  • Government taxes and professional fees
  • Policy claims  

The difference between collected premiums and these expenses is known as underwriting income. When an insured party proves a greater risk than anticipated, resulting in a reduction of underwriting income, the insurer will either raise the insured’s premiums, reduce or deny valid claims, or drop the insured from coverage altogether.  These are all common tactics designed to mitigate the insurer’s exposure to loss. 

Sometimes, it is the policyholder who opts to cancel their insurance policy. A policy cancellation results in the loss of monthly premiums from one client and the need to replace that client with another. However, the insurance company still walks away with a financial advantage.

2. Cancellations and Coverage Lapses 

When policyholders cancel or allow their policies to lapse, there are two immediate benefits to the insurer: the insurer’s liability is eliminated when the policy is canceled, and previously collected premiums translate to pure profit. For canceled policies with a cash value, such as whole life policy, insurance companies pay the client’s cash value from interest and investment gains while retaining the initial capital investment. 

3. Investment Income

Insurance companies transfer collected premiums into the financial market via tightly regulated, low-risk investment options. Known as “floating,” insurance companies generate interest and growth income from invested capital. 

Though insurance companies must maintain a certain amount of cash reserves to pay policy claims, their large pool of premiums allows for significant and diversified holdings in the financial sector. As with underwriting income, if investment income suffers a decline, the insurance company can raise policyholders’ premiums to cover the downturn. 

South Carolina Personal Injury Attorneys

Insurance companies are in business to make money; and, they make a lot of money. Through underwriting income, policy cancellations, and investment income, insurers successfully grow their profits while protecting against loss by fighting property and personal injury claims. 

If you or someone you know has suffered property loss or personal injury in South Carolina, don’t face the insurance companies alone. Experienced personal injury lawyers easily recognize manipulative and bad faith practices of big insurance. 

Contact our office today to speak with a trusted South Carolina personal injury attorney who will fight for your right to fair compensation and win against big insurance.