How do auto insurances make money

How do insurance companies make their money?

How do insurance companies make their money?

Insurance in general is a complex business model that is fundamentally based on economic thinking. The ideal case for an insurance company is to have as many policyholders as customers who do not have any insurance claims during the insurance period. Of course, this utopia does not correspond to reality. For this reason, insurance companies nowadays have to calculate strictly in order to be able to remain efficient at all times. In order to be able to build up reserves, it is often inevitable for policyholders to adjust premiums. The more claims an insurance company had to settle in the course of a year, the sooner the contributions for the respective insurance line of business are adjusted upwards. This is of course put in a very simplified way, because after all, insurance premiums are also influenced by other, external factors such as inflation.



All insurance is based on the principle of collective risk assumption. This means that every policyholder has to pay insurance premiums, which flow into a pot of money with the respective insurance company. This money pot is also known as the capital pool and ultimately forms the financial basis of every modern insurance company - worldwide. If a claim occurs, the corresponding sum is paid out of this money pot to the policyholder concerned after the claim has been checked by the insurance carrier. Even if this sum should exceed the previously paid-in contributions by the policyholder, the insurance company is contractually obliged to pay the sum necessary to cover the damage.

Nowadays, experts refer to insurance as an indispensable tool for ensuring tomorrow's financial security today. Assuming a private individual had to pay for any damage they accidentally caused to other people or their property in the course of their life, that person would very quickly be on the verge of financial ruin. To put it bluntly: a person would only go to work to be able to pay their own debts.

Taking health insurance as an example, this would mean that all costs incurred for restoring or maintaining health would have to be borne by the person concerned, which would be impossible, especially for low-income earners.

For this reason, at the end of the 19th century, social insurance was introduced in Germany to protect workers. For this reason, social insurance is compulsory for every employee in Germany.

Even if these are state insurance forms, these are also forced to act economically in order to remain liquid and thus efficient at all times.

In summary, all insurance companies can only make money if they make more money through insurance premiums than they have to spend on claims payments during a year. This affects state insurance companies as well as private insurance providers. The fundamentals of financial mathematics are indispensable for the respective insurance company. These in turn ultimately determine the amount of the insurance premiums that the policyholder has to pay for a particular insurance policy.