Sunday, February 24, 2008

How does an insurer survive as a business?

Insurance companies promise to pay for different insurance needs. Nowadays health insurance, life insurance, vehicle insurance etc are not uncommon. Different companies insure with different policies. What makes them different is the nature, qualification and affordability of the person that these insurers target.

As they promise, if the said event occurs then the insurer pays the amount to the insured person or their family. But one may wonder that the premium for the insurance is nowhere near the insured amount. Then how does the company do its business?

The fact is that the business survives. Those insurance companies who start this business start after studying the statistics of the events, either medical, accidents or anything. Then they find out the profitability of their business based on the expenses a person needs in the said event. If they can get to a premium affordable to the patient and if the statistical data shows that the amount they pay to the insured person is less than what they get as premiums from different people, then their business is profitable in the long term.

There may be times like the September 11, 2001 when unfortunate events occur and shatter the lives of many. These times are really unfortunate for the insurers. For that reason, insurance companies suddenly increase the premiums after such events to recover from the losses.

But surely this business is risky. That is the reason why many private insurers do not pay in full or not at all unless the situation demands.

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