I'm here to explain the difference between how insurance companies make their money and how much they pay for this fun fact, I actually learned some of the things that I used to do about six to seven years ago now are licensed in 38 states and over, I sell insurance in just about everything.
It's, pretty basic when it comes to insurance. There's, a lot of set guidelines and then each state has a little specifics with things, but the profit of an insurance company looks huge. If you really look at them and it really is they make a lot of money.
But how much are they actually taking out of your pocket? One of the biggest things that people think is insurance companies are out to get you there, not there, just like any other company. They're trying to make as much money as they can so what they're doing.
Is there, trying to make as little claims as possible insure it the highest possible value that you're willing to pay for in competition with all these other companies? Each department has a different section, so what an insurance company does is they take their product line and they have actual people that check the prices.
They say: okay, one of our competitors, doing how much can we do and how much can we earn? Are we going after the high-risk people that only do you know that have a higher chance of getting an accident? There is no, probably a little worse area as far as claims go.
More natural disasters could happen there, or do we want to go more of a confident planner? Do we want to stick with just the people that we know want insurance? They see the value they want to talk to the company.
It's, going to take care of them for life. They don't want to have to worry about it, so there are different types of insurance. However, most companies have different companies that do both so like you have farmers' insurance.
They have Bristol West that's, As their higher risk company. You have Geico, who naturally is a higher risk company, although they & # 39, ve got pretty good margins, you also have all state who have assurance so that's.
More of they call it a direct model, it's a little different, but it's, more of higher risk. That's. The type of person that you're pulling in you're. Confident play typically wants to talk to a specific agent.
The way an insurance company makes their money is they invest the money that you've paid into the stocks they put stocks and bonds and anything that's more liquid dateable. So if there is a major claim that can pull that money out and pay those claims, they take the amount you're, paying for the premium subtract the amount that the estimate could possibly happen.
So the odds of you causing a claim or filing a claim, and then that's, that your combined loss ratio. They want to be 0.9 seven cents of ninety-seven cents per dollar is what their averages. That is tiny.
You have a thousand dollar policy. They're, making $ 30 on that thousand dollars that risk for them. But here's. The trick seems they're, going to take that money that you're, giving them for the service and there, going to invest it into bond stocks.
The market anything that's growing, something that will earn them interest so if they can make six percent eight percent on that thousand dollars. That's where their money comes from.
Going to read this right from my cell phone here, I had to look this up myself, just to make sure I was right, so this is from 2011. It doesn't matter because it hasn't changed there's, not a different way that they invest; they invest how much they invest and that's.
The thing, however much premium they take in they put as much of it in the investment and then take out to pay any shareholders if they have a shareholder ship.
They lost 1 billion nine hundred ninety-three million dollars that's crazy. They lost almost two billion dollars, but here's, the kicker they actually earned or made two point nine billion dollars in revenue.
So, even though they paid out almost two billion dollars in claims, they actually made almost three billion dollars for that year. See when you take that money invest over time and it grows it's like that snowball.
You see whenever you're watching those investment channels, it grows and it grows, and now they & # 39. Ve got billions of dollars growing and it's just massive, and so they just keep investing it. Keep investing it taking little pieces out for their investors or for you know, for the different things when there's, a major claim or major loss, that's where it hurts that's.
Also, why you see the insurance prices go up, because if the stock market goes down, who the money starts disappearing and then the claims go up the boom, you could be completely out of business. So in reality, when somebody says hey, we're only making five cents on this policy that's, not where they're, making their money.
So the insurance companies aren't necessarily trying to take advantage of you. They're, going to earn the money with or without you, they're. Just praying that you guys don't file, a claim, because the more claims that go in there, the lower their profit margin, the lower the stock market, goes the lower their profit margin.
If both of them go bad opposite, then they're done. They're, going to close the doors because you can't make money when the stock market is dead and you're paying out. All these claims and you took in the low ink the low money paid out a lot and it's done as long as the stock market is good, which it's, pretty much always been if it fluctuates, so that's why insurance companies go crazy in 2016 into early 2017? There was a little bit of shift now because the economy has kind of flipped around a little bit.
A lot of companies are getting more claims, not because there are more accidents, but if there is, but what's happening is a lot more. People can afford newer cars, nice, your cars, so there's. A lot more people driving a lot more people purchasing cars.
The gas prices have been down lately there's a lot more activity in the insurance companies. There's, not really a way to track that they're. Trying to put it in their bubble, so they can, you know, figure out how much to pay you I mean the government regulates what the insurance company can do, so they can't come out and take advantage of you.
Whenever you take a policy. You purchase that premium. What's happened? Is the agent or the person that quoted you? It might be a direct salesperson, so what they did is they typed in all your information in the computer and they had created an algorithm or ax or a worst-case scenario with all of your discounts, if you're, not smoker, if you're, you know married if you own a house, go look at my other article for discounts.
That means the premium is going to be lower for you. There's, something called underwriters and what their job is to do is to underwrite the business.
So if you have your estimated claims, so we expect that you're, going to file a claim for $ 600 in the next five years. We want to underwrite that business just a little bit below just so. You're, not you know.
It fits the premium that you can pay for the risk they're, not going to lose their shirts and they're. Going to be within usually a 3 % difference that's, why they say every 90 cents, every dollar that they take in 97, 98 % goes out.
Some companies go really aggressive and they just need new customers, so some of them plan on being overpaid out so they expect to take in a dollar pay out a dollar 10. They're trying to pull in customers and then hope that the risk is that high, that way, they don't lose out.
It's, a risky way to do that. So if you ever see a company having a higher loss ratio, then they're taken in that's, a good indication that things are going to change pretty quickly. The best way to check this.
If you guys want to find out where the stability of a company is, there is a website it & # 39, s called am best you just type in Google am best and they're, a company that rates other companies. So if you want to see what insurance company is doing well, which one has the best loss ratio, then go check that out it's, really simple: they're rated, an A to B form, so an A+ or an A+ plus.
I believe is the max: if a company is an A+ or higher, that means they're stable. They're, not likely to fluctuate as much as prices. If you guys want more advice or more tips or just have general questions, leave them in the comments below I'd love to answer them, love to help.
You out hope. This helps if you guys would love to help me out, share the article with anyone you want don't forget to Like, and subscribe at the bottom, and welcome to my channel. I don't, have an intro or an outro, so whatever for now, this is Mark signing off