Brigham Cluff: How does an insurance company make a profit?
Derek Wilcock: They basically take their premium dollars. Let’s say you have a car policy and you pay $500 or $1,000 a year for your car insurance. The insurance company then looks at what their losses are and let’s say on average they pay 60 cents per dollar for those losses and then on top of the 60 cents per dollar, they have to pay the agent commission, the claims people, all of the operating expenses that are involved with having that insurance policy. After all those expenses are paid, then, that’s their profit. It depends on losses, if they have a lot of losses, they could be paying $1.10 for every dollar they bring in, they’re losing money. There’s some companies that may only pay them 60 cents for every dollar they’re bringing in, they’re making money.
That’s how they make their money: when you take everything that’s paid out, all the expenses, the commissions, the operating costs, the losses that they’re paying out. Take all that and once all those are paid then they have their profit. That’s what they end up dispersing to shareholders or what have you. That’s how they make their money.
They also invest their money, life insurance companies, for example. A lot of people don’t realize this but life insurance companies are one of the largest landholders in the United States. They buy land and with that land, they invest it and make money that way. A lot of people think they just pay their premiums, that’s how they make their money. No, they go and invest those premiums.
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