
How Do Insurance Companies Make Money - Tech_marketing
http://techmarketingtips.com/how-insurance-companies-make-money/
======
chadash
Here's an illustration from Progressives 2019 financial results [0]:

Revenues:

Net Premiums - ~36b

Investment income (includes interest, dividends and accretion, but not capital
gains on sales of securities) - ~1b

Gains on securities (capital gains on security sales) - ~1b

Fees - 0.5B

Service revenues - 0.2b

Total revenue: 39b

Expenses:

Losses and loss adjustment expenses (i.e. payouts to policies) - ~25.5b

Policy acquisition costs and other underwriting expenses - ~8b

Other - 0.4B

 _Total expenses - ~34b_

So that's about 5 billion in net income before taxes.

Overall, about 80% of profits in this case come from collecting more premium
than paying out in claims. About 20% come in from investment income. This is
because they collect your premium upfront, but don't need to pay out until you
have a claim. So that money can be invested in the meantime. Notably, an
insurance company can be profitable if they invest well, even if they take a
loss on claims.

[0]
[https://s24.q4cdn.com/447218525/files/doc_financials/2019/an...](https://s24.q4cdn.com/447218525/files/doc_financials/2019/annual/assets/pdf/Progressive-2019-Financial-
Review.pdf)

------
jonrx
I worked in insurance for approximately 5 years, and had a foray in
reinsurance for 3. To this day, I find this to be an amazingly complex and
interesting industry from an cash-flow perspective.

Insurance is also a weird product from a consumer stand-point: for most people
(at least in Canada) there is little to no difference between company
offering. If you take P&C, there is a lot of competition for pricing, and a
lot of the "end-stream" innovation is about containing costs (fraud, company-
owned repair shops, avoiding litigation). Loss ratio is probably the word I
heard the most from my actuarial friends.

P&C and group insurance, since everything is renewed every year, see a lot
more disruption and effervescence in the market. It's harder to disrupt life
insurance when you're on the hook for 10, 20 or even 70 years. I think that
participating life was a game changer, and even then, its popularity is really
tied to the market. There is a lot of research being done as well to better
assess risk without being invasive (fluids, extensive questionnaires, etc.).
But when you're on the hook for a long period of time, your mistakes along the
way tend to stay for a long time. And going under is -- I think -- worse than
any other industry. You pay premiums to insurance companies because you trust
they'll be alive in the future!

Speaking of loss ratio, most companies are also now heavy towards automation,
again to reduce costs. I know this has been over-played elsewhere in the
industry, but here a lot of the key-players are massive and slow moving, and
at their scale, little movement can mean a lot of change.

------
thebrid
Warren Buffett talks about the profitability of Insurance Companies a lot in
his annual letters. A key part of this is the float. Insurance premiums are
generally paid up front but losses are paid out after the fact. This means
they end up with large amounts of other people's money (or "float") which they
can invest.

If the company does a good job estimating risk and pricing policies, they will
make a profit on the policy itself. If that happens, they are effectively
being paid by their customers to hold their customers' money and get to keep
any investment returns on it!

[https://www.businessinsider.com/warren-buffett-insurance-
flo...](https://www.businessinsider.com/warren-buffett-insurance-
float-2017-4?r=US&IR=T)

~~~
snarf21
It is interesting that some insurance companies even run at an actuarial loss,
meaning they pay more in claims than they take in in premiums with the
expectation that the float will cover that loss and leave plenty for profit.
Health insurance companies work the same way. Insurance companies crave the
float. This is why you see so much advertising and that they are willing to
spend so much on CAC. People rarely switch companies and your lifetime float
is worth a lot!

~~~
iguy
If you made money on the funds invested, and lost money on every month's
premiums & payouts, then why not close down that half of the business and
become just a hedge fund?

I guess it's life insurance that's a special case here, in that customers sign
up to pay a flat rate for (say) 20 years but the chance of payout is much
higher towards the end. When you close down & sell your insurance business to
your competitor, a policy that's half-way will surely count as a liability,
and so it may be very expensive to wind things up: you'll have to hand over a
lot of the float to get someone to take the contracts.

~~~
thisisnico
I'm assuming because it's difficult to open a hedge fund and obtain the same
scale and amount of cash easily or quickly. Also, the fund is an entirely
different model, you're paid management fees based on the profit you make your
investors. If you own the insurance company, the investors (insurance payee)
are not reaping the rewards of the invested cash, you take 100% of the rewards
of other peoples money, interest free, think about how incredibly powerful
that is.

~~~
iguy
Starting an insurance company is surely a lot more tightly regulated than
starting a fund.

There are various values for "you" here: The professional who manages the fund
day-to-day needs to be paid no matter what the company says it does. The
owners have a choice of whether to sell the car-insurance side of their
business. And people looking to start a new business from scratch have
different concerns.

------
koheripbal
Broadly, they make money by doing statistical analysis on risk. If they can
price the risk more accurately than their competition, then they can capture
more premiums for less claim risk.

Maybe it's a function of zip code, sex, age, profession, hobby, weight, etc...
while another company will add a question about exercise level and put
different multipliers on each of those.

They are constantly refining their statistical models to gain an pricing
advantage over the competition without taking on more undo risk.

This applies to all kinds of insurance.

Combating fraud is ALSO a big thing. So they often share lists of customers
they believe have defrauded their policies in the past, and are starting to
use AI to find which patterns reduce the risk most, as well as getting around
certain metrics they aren't allowed to ask about - like ethnicity.

~~~
larrydag
Yes risk is attributed to premiums. Yet I talked to an employee at a large US
insurance firm and he said they take a loss with premiums. All the premiums do
is go into marketing and advertising. They make their money by investing. So
basically insurance firms are hedge funds with cash flow.

~~~
yold__
I think you misinterpreted what was said. A company taking an underwriting
loss like that would be shut down by regulators in a heartbeat. There are very
large regulatory capital requirements in life insurance, which is why you
don't see new entrants into the market.

~~~
tfehring
I'd interpret "they take a loss with premiums" in the parent comment as
meaning the nominal value of expected claims exceeds the nominal value of
premium. And that's very commonly the case for interest-sensitive life and
annuities. It's equivalent to the expected IRR from the policyholder's
perspective being greater than 0, and it would be hard to justify selling an
investment-oriented product with a negative expected return.

Or consider a SPIA with a return of premium guarantee. The total claim
payments will always be greater than or equal to premium on a nominal basis,
so investment income necessarily funds over 100% of the profit.

------
cjf4
Another element to insurance I haven’t seen covered here is that they have
their own micro cycles somewhat independent from the macro environment, called
hard/soft markets.

What happens is at some point new entrants or firms that want too grow will
offer lower rates and/or loosen underwriting criteria. This forces incumbents
to do the same to some extent to stay competitive (soft market).

Over time, risk and eventually losses, accumulate. This stops the loose
underwriting practices as firms can no longer sustain additional losses. This
allows incumbents to raise their rates (hard market).

These cycles vary by insurance product but can cause huge revenue swings year
to year.

------
leviathan235
I've covered insurance companies for a number of years, and here's the
rundown:

\- Like any other financial services company, insurers' primary concern is
risk management. In contrast, a retailer knows exactly what its profit margins
are before the product is sold - its primary concern is to sell as many
products as possible profitably. However, insurers and banks can sell infinite
policies/loans so long as the price is low enough. They also don't know their
margins for sure until the policy/loan is complete.

\- The average insurer makes more than half their profits from investment
income. Most insurers are garbage at writing policies, with the P&C industry
averaging around mid-single digit ROE in a year with average catastrophe
losses. When I checked a few years ago, aggregate combined ratio (sum of
losses & expenses divided by premiums) is in the high 90's percentage.

\- Loss costs are getting ridiculous these days (trial lawyers, social
inflation), almost across the board, so you're seeing insurers start raising
prices across the board. Add to that zero interest rate policy courtesy of our
unaccountable central bankers, and insurers are forced to push premium hikes.

------
SllX
Well informed legalized gambling against certain outcomes backed up by
contracts with a large sum of people. The goal is to win more bets than it
loses. To cover the losses for the times that it does lose the company pools
the money you and others pay every month together. Whatever is left in the
pool after all the contracts end is how much money the insurance company made.
If they have to pay out more than is in the pool, then they lose money. Rinse
and repeat.

------
choeger
And now think about the market. What distinguishes insurance companies? How
can they innovate?

Aside from structuring the policies there is little room for innovation. And
the competition can easily copy them. What remains is to reduce the sum of the
expected claims. This is where blackboxes and stop smoking campaigns come
from. But again this is not really that successful.

IMO the most obvious strategy is vertical integration. After all, most people
are not interested in insuring against hospital or car repair invoices, but to
obtain good health-care or a repaired car.

So insurance companies should try to operate their own hospitals or repair
shops, operating them with little profit and stash the savings.

~~~
ssharp
How can they innovate? There is a lot of "insuretech" out there right now.
There has been a relatively large shift into direct-to-consumer insurance as
well, rather than needing to go through an agent. On the tech side, for
example, there are companies like Root and Metromile on the auto-side who are
doing per-mile / driving habit pricing based on logged activity in your car.
You can also innovate a lot on the claims-side to make the product easier to
use. Lemonade is doing this with homeowners and renters insurance, allowing
you to just take photos of your claims. Innovation can also happen on the
backend with things like automating claims that can help drive down cost to
increase margin or offer more competitive rates. Finally, the innovation has
always happened on the actuarial side to better assess risk so it can be
priced in a way that reduces the risk on the insurer.

There is a fair amount of vertical integration happening already. Finding ways
to reduce "retail" pricing for claims for insurance companies is a pretty big
deal.

------
Gys
Unavailable?

Clickbite title? Traditionally companies make money by spending less than what
they receive...

~~~
laurensr
This is known as "The HN Effect" where sites are temporarily overloaded (and
go down) because they are featured on HN's home page.

~~~
fn42
This has had a lot of names ;)
[https://en.wikipedia.org/wiki/Slashdot_effect](https://en.wikipedia.org/wiki/Slashdot_effect)

