Profit (Auto Insurance Companies)

How do car insurance companies make a profit? Profit for auto insurance companies mainly comes from the premiums drivers pay in exchange for their auto insurance policy. Insurance providers protect their profit by minimizing their risk. This is why it is hard for high-risk drivers to find insurance as many auto insurance companies do not want to risk their profits to provide coverage.

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Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Oct 30, 2020

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The profit for any business is the total income of that business minus all expenditure and the same is true for US insurance companies.profit

Insurance companies in the United States are mainly private companies and that means they have a legal obligation to make a profit for their shareholders and to try and maximize that profit through reasonable action.

How does a US insurance company make a profit?

The primary source of income for most insurance companies is the premiums paid by their customers in exchange for their insurance policies.

In order for an insurance company to make profit, one of the most important obligations is for the insurer to manage their approach to insurance risks so that the money they earn through the payment of premiums exceeds not just the costs of any claims or benefits that they may pay out during the period but also so that the amount of premiums collected exceeds the total of this figure and the operating expenses of the business during this period.

Operating expenses are to pay for the things an insurance company has to do in order to offer coverage for the parties they insure. This includes things like rent of buildings, utility costs, the wage bill, IT infrastructure, etc. as well as paying their sales force commissions (an insurance company will normally use an insurance agent or insurance broker to sell policies to the general public or businesses and these people need paying too).

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If my insurance company pays out more in benefits than it collects in premiums does that mean it won’t make a profit?

Not exactly, in some cases an insurance company will have additional investments available for generating revenue – for example, it may hold stocks and shares in other companies, or reserves of precious metals which have appreciated in value, or real estate holdings, etc.

In this instance it may be possible for an insurance company to compensate for losses incurred through paying out more in benefits than it collects in premiums, but this situation cannot continue forever and if it did the insurance company would gradually go insolvent which isn’t good news for policyholders because when an insurance company becomes insolvent it may not be able to pay out on any existing or future claims.

In general, it’s important for policyholders and shareholders for insurers to make money.

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