Insurance Explained – How Do Insurance Companies Make Money
Well, some of us might think that there is nothing more boring than attending a wet Tuesday night Insurance Explained conference in Boston. And we may be right, but it is not as dull when we look back to see how the industry started. From swashbuckling pirates to the fiery fire ravaging the largest city in the world, the Insurance Explained industry has had a colorful past. But how are these grey suits that sell insurance actually making money and how does the internal functioning of one of the most complex fiscal models really work? If you are curious about these things, keep up with the current episode of the Infographics Show – Why do insurance companies make money and how do they work? What does insurance mean? Well, insurance is a financial vehicle for spreading the risk.
By taking a risk from a person and spreading that risk around a community, the person can live his or her personal or business life without collapsing from financial ruin. Let’s look at two people in the simplest terms. The first is Bob and the other Jim. Bob says I’ll give Jim ten dollars, but you’re going to have to buy me a new one if I lose my cellphone.
Insurance Explained – How Do Insurance Companies Make Money
If Jim agrees, then there’s Insurance Explained. Insurance companies make money because they assess the risk and decide whether the gamble is worth it. Jim believes Bob won’t lose his telephone, so he will be 10 dollars richer. If Jim finds a hundred more people willing to give him 10 bucks each, he has 1,000 dollars. If one of those 100 people loses his phone and Jim pays $100 as compensation, he’s still 900 dollars.
This idea of Insurance Explained has floated since the ancient Chinese and the Babylonians spread their transport risks. But modern Insurance Explained did not really start in London until around the 17th century. Maritime merchants and traders often hung in coffee shops in the London business district, and the idea of modern Insurance Explained was born, drinking copious quantities of coffee. In one of these coffee shops was Lloyds of London, the heart of worldwide Insurance Explained, developed and how it worked. First, you got the customer. Say the customer has a ship that is nervous about losing pirates offshore, or maybe the ship is destroyed in poor weather. The customer approaches an insurance agent.
The broker looks at the ship or pays someone to look at the ship and decides how much the ship’s total value pays. The broker will then evaluate the risk. He asks the customer where he is going and what cargo he is carrying. With all this information, he creates an insurance policy that shows the third person in the chain – the contractor. The underwriter may exclude some risks for a cheaper premium. And he may contain some additional risks for a few more bucks.
Many underwriters are normally approached, but one is the lead, and, as Jim does, the lead underwriter usually takes the greatest part of the risk and signs his name first on the policy paper. He is known as the underwriter because his name is written under Insurance Explained policy risk. The leading contractor takes the main decisions when accepting the policy and will be the main person to agree to any policy claims.
The terms of the policy shall be made legalistic, the customer shall be satisfied and the ship shall sail – but not before the insurance premium is paid to the courier, who shall take about 10 percent, and shall transfer the remainder to the underwriter. But what if pirates board the ship, steal, and burn the cargo in the sea? Well, the customer (if he’s still alive, if not the customer’s representative) will talk to the insurance broker and the broker will visit the lead contractor and tell him about the bad news. The other contractors (there may be up to 20 on a major policy) will receive the news and the broker will then have to negotiate for the client or his representatives the best claim settlement.
The companies pay the money to the broker, who transfers the money to the customer, without any cuts. Once the premium is paid, the broker makes money and helps to negotiate the best claims for his customers with gentlemanly honor and future business prospects. Now all the bad news for the Underwriter may not be. He may have reinsured the policy if he is wise and not greedy.
Reinsurance puts the contractor in the customer’s position. The underwriter sells the policy to another underwriter while retaining the premium share.
Still, confused? Return to Jim and his telephone Insurance Explained. If Jim resold his 10-dollar telephone policy for 9 dollars, instead of the 10 he received, he keeps a dollar for each of his 100 customers for 100 dollars. Likewise, much of the modern insurance covered by Lloyds of London has been reinsured from the building to smaller companies worldwide. So what begins with a simple agreement between the customer and the broker (or Jim and Bob) is spread across the business community, everyone who benefits from the premium or reduces loss.
This is how insurance works – through risk spreading across communities. That’s how shipping Insurance Explained was born. It was developed by the need for shipowners to continue in business if they lose everything at sea. But what about real estate insurance? Well around the same time, in 1666 London’s great fire devastated the city of the origin of modern insurance and in his great London redevelopment project of 1667, the renowned architect Sir Christopher Wren ensured the inclusion of an insurance office in his new plan. Property insurance is now common for most homeowners with a policy.
Medical policies, life, travel, car Insurance Explained, and dental insurance are all common. Even pet insurance is now a major Insurance Explained company.
The business model has evolved over time. Modern-day insurance companies are extremely competitive, which is good for you, the customer because the price of the policies is as low as possible.
Companies now want to create a financial pool by writing as many policies as possible. Thousands of policies pay the premium and invest this money in another financial product.
The Insurance Explained underwriter can therefore pay more claims than in political premiums. However, all these premiums have been invested in a high-interest investment scheme so they make their money outside the original insurance product.
Insurance is a way of creating cash flow for lucrative investments in this example. And if you’re wondering what other creative and profit-oriented ways to make more money, take a special class called “How to generate passive income.
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Are you insured to protect yourself from the unexpected? Do insurers charge too much? Is everything just a scam? In the comments, let us know your thoughts! See also our other U.S. Teachers vs. UK Teachers video See you next time! See you next time.
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