In the insurance market, the insurer is the company or entity that sells the insurance. In this article, you would learn how an insurer functions and what an insurer's business strategy is. By knowing this, you would be at an advantage by knowing exactly what to expect from insurance companies and how to get the policy that fits your needs.
Now, how does an insurer get a profit by agreeing to pay for others' damages? What is there to gain for a company other than bankruptcy after paying everyone else's bill? Are they really that generous or is there another reason for them doing so? An insurer, incredible as it may sound, does get a profit by paying for the expenses of others. The profit that they earn is from their earned premium and investment income, after deducting the costs of paying damages and for underwriting expenses. In short, they make money by underwriting your risks and deciding your premium, and then investing your premiums.
Underwriting is the most difficult job for the insurer. In case you are wondering, underwriting is the process by which an insurer decides what risks to insure you against. It requires a lot of data, most of them being personal information. An insurer has to correctly predict whether you are worth being insured or not, because insurance is just like any other business in Florida. An insurer will only insure you if you are not likely to use that insurance.
Calculating risks is very tricky and for this purpose, insurers use the principle of actuarial science to measure the risks and finally calculate your premium. This actuarial science mixes probability and statistics to calculate your exposure to dangers and the chances of you raising a claim in the future. Underwriting is important because insurers make an extra profit once the policy is terminated without any claims. That is, they get back their investment along with the premium they collected. This is called the underwriting profit of the policy. The efficiency of underwriting is checked by looking at the ratio of losses and expenses to the premium earned. Anything less than 100 percent is generally a profitable Florida business while above 100 means loss to the insurer.
Even if insurers pay for claims raised by the customers, they get profits based on float. Float is the remaining money at hand, after collecting insurance premiums but without paying the claims. They invest their premiums immediately after receiving it, and keep getting interest or other incomes while the claims are being paid.
Hence, you can see that insurers don't work on charity nor do they work on minimum profits. Insurance is, in fact, a highly profitable trade because insurers only look out for safe investments. So make sure to show yourself as a worthy customer for them to get better premiums for your policy.