How Insurance Companies Make Money
There are all kinds of insurance policies available to consumers. Auto insurance homeowner’s insurance medical dental vision insurance personal liability umbrella’s life insurance long term care insurance accidental death and dismemberment insurance.
The point is if you can identify a risk that concerns you you could probably find an insurance product to guard against it for the insurers. It all boils down to math actuarial math actually insurance companies are also known as insurance carriers. So risk protection which is known as insurance coverage in the form of policies consumers and businesses pay a fee known as a premium to buy them.
The underlying business model is fairly straightforward. Collect more in premiums than the amount you’d end up paying out for it claims that are made against the policies you sold. Also collect enough to cover your administrative costs and still have enough left over to post a profit.
But how do they know what’s the charge. This is where the actuarial math comes into play. Actuaries use math statistics and financial theory to estimate the likelihood or what’s called the probability that an event may occur as well as to project the financial implications.
Should that event come to pass. So they use data from large groups of people with similar characteristics to your own in order to figure out what to charge for the coverage that you’re seeking. That’s why auto insurance premiums are higher for college students than they are for 40 year olds. It’s also why homeowner’s insurance is more costly on the San Andreas fault than it is in Bangor Maine.
There are also other factors that are taken into consideration during what’s known as the insurance underwriting process. These include special personal characteristics such as credit bureau reports insurance claim history driving records and so forth policies are also very precise and what they will do will not cover for example risks that are difficult or impossible to protect against or excluded from coverage.
And some examples of these exclusions include an event affecting a large number of people in the same place at the same time like a terrorist attack or an event that’s within the insurance control such as suicide policies also established deductability limits deductibles or in effect co-insurance is the portion of your claim that you’re required to cover before the insurance company pays out for the rest of your loss.
So say you have an accident and the cost to repair your car is fifteen hundred dollars and your deductible is a thousand dollars. The insurance company will pay you fifteen hundred dollars minus your $1000 deductible or $500. If the accident was your fault then the deductible you covered is yours to bear.
However if the accident wasn’t your fault the insurance carrier will work with you to collect from the other insurance carrier. The money it paid to you as well as the portion of the bill you initially covered deductables serve another purpose as well. The extent to which you’re willing to assume more of the financial risk for the losses you incur will count against the premium the carrier would otherwise have charged.
But it’s not a dollar for dollar proposition. In fact you’ll probably find that will take many claims for years to score the value of the premium savings with the increased financial burden you’ve undertaken in the form of a higher deductible.
That’s just one of the reasons to shop for the best deal which is number five on my hit parade of things you should take into consideration when you’re in the market for insurance. So starting with number one the zero in on that type of coverage in the house car or medical You may also want to have a discussion with an insurance agent or broker that specializes in the field.
Number two if you’re insuring property or possessions you’ll need to get a handle on current market values and B-3. Take the time to understand the exclusions that are listed in the policy and be sure that you could live with the limitations. Number four determine the level of deductible you can comfortably cover whether from your monthly cash
flow or by way of an emergency stash that hopefully you have in place. Number five. Shop for the best deal. The book has links to several online sources for competitive insurance quotes which you can compare to the price quotes you may solicit from the agents and brokers you consult with.
Number six do the research. The book also has links to a site that reads the financial capacity of the different insurance carriers which when you think about it is pretty important because you’re relying on their ability to make good on your claim.
There are also links to other sites that address customer service and consumer satisfaction levels.
Number seven. Last but not least if health coverage isn’t offered by your employer or if things are particularly tight after you leave school. Look into continuing coverage under your parents programs if they have one.
The Affordable Care Act of 2010 permits you to piggy back on their policy until you turn 26.