Insurer's business model

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The formula used by the insurance company to earn profits are vary simple as given below'

Profit = Premiums Received + Income received from investment - losses that have occurred - cost of underwriting.

The insurance companies make profits in two ways;
1. By acting as underwriter, where in they select the risks they wish to insure and then deciding the premium to be taken for insuring the claim.
2. They invest the premiums received from the insured to earn profits.

Underwriting of a policy is considered as the toughest part of the insurance process. The insurance companies analyze a wide variety of data and come with the risk involved in making an insurance policy and on the basis of various factors decides the premium to be charged on such policies.

They also use various scientific techniques to determine and to quantify the risk involved and also the premium to be charged for such a risk. All the data available is used to project the future claims that will be made on the policy according to the risk that is involved. For the purpose of accurate calculation accurate sciences like statistics and probability is used to analyze the risk involved.

Once the policy is terminated the total premiums received minus all the claims pain is the profit that the insurer has made on the policy. In short the companies may make a profit if the claim amount is lesser than the premium paid and will go into loss if the premium is lesser than the amount that was claimed.

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