Insurance Companies
Business Model for Insurance Companies
Insurance companies have been around for centuries, but
what makes the proper business model to run a successful agency?
The basic business model for insurance companies is based on diversifying risk.
This means pooling together a large number of people who have minimal
risk so that revenue gained is more than enough to cover any losses due to
successful claims.
Premiums are charged which are then collected and
reinvested into other assets that also build revenue for the company.
As with any private company, the goal is to provide consumers with an
affordable product that can be quite helpful when needed, but not at the risk
of the company itself.
Risk
& Pricing
The primary task of insurance companies, particularly
those who cover health, property, and finances is to assess the risk of the
person or business
being insured and set a fair price for the premiums.
Risk is assessed by determining the chance that an
individual or company will need to make a claim. This is where proper
underwriting is so important.
Otherwise, some people or companies will be charged too much on their premiums
while others not enough.
Charging too much will drive some customers away while charging too little may
result in putting the insurance company at financial risk.
Revenue
Building & Interest Earnings
The money collected through premiums is not squandered
by insurance companies. Instead, it is invested so that the revenues build
continually.
While the money gained can be held or placed into a savings account, the right
business model for insurance companies in
terms of investment are usually to place the revenue into a safe, short-term
asset.
Interest-bearing cash equivalents, high-grade corporate
bonds, and Treasury bonds are common places for insurance companies to
invest the assets they have gained through premiums. The interest earned adds
to the protection of the company in case a major event causes a
considerable number of claims to be made.
The most common type of event is a natural disaster
which affects a wide range of insurance customers. By building the assets that
have been gained through premiums.
The insurance company is protected from large losses generated by natural
disasters.
Reinsurance
Another way that insurance companies protect themselves
is by purchasing reinsurance.
This is basically insurance for insurance companies. This protects them against
losses too large to be covered by their assets.
Reinsurance is often used when a natural disaster
strikes an area considered at low risk.
When such an event occurs, the insurance company is often not able to pay out
the claims because of the
low premiums that were charged. But reinsurance provides them with the cash
necessary to cover the claims.
Diversification of assets combined with reinsurance for
the unexpected offers a solid business model for many insurance companies to
use.
The most effective business model for insurance companies
provides the widest amount of coverage for the most people.
By having a broad enough base, the company can absorb losses that are generated
through claims. This means asserting the risk of individuals based on several
factors which in turn create the premiums which are charged.
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