Question

How can an insurance company make a profit by taking in premiums and making payouts?

Answer 1

The value of the premiums the company takes in is higher than the value of the payouts it makes.

An insurance company is a business that provides coverage, in the form of compensation resulting from loss, damages, injury, treatment or hardship in exchange for premium payments.

Insurance companies make profits by setting premium levels that are higher than necessary. Insurance companies make profit from short-term investment of the premium money they gain as premiums. However, the payout of services is received several months later.

Answer 2

The value of the premiums the company takes in is higher than the value of the payouts it makes.

The insurance company always has a collection of premium. They will pool these premiums and invest it to other investments that have guaranteed payouts with the highest interest earned. In the event of payout, all revenue earned net of the amount paid is the profit of the insurance company.