"Premium" is the amount of money an individual or business pays for an insurance policy. For every $1 in premium received per client, approximately 70 cents of it goes to paying claims. Around 17 cents goes into paying for marketing and/or agency commissions. Then, about 10 cents for other overhead and administrative costs.
Today, there are hundreds of tech insurance companies (known as Insuretechs) in the industry that try to disrupt the market. Most have FAILED and eventually create a product available to the individual agencies scattered throughout the states like Northshire Insurance, or they shut down altogether.
Most insurance carriers in any given year and state LOSE money on their underwriting model. They collect premiums on “risk”, aka your car, home, or business, to try and collect more premiums than they pay out in claims.
Insurance carriers rely on EXCLUSIONS to keep their loss ratio low -- this makes insurance affordable. Without this, let's say, if wear and tear or mold were usually covered, insurance would become unaffordable for most. Remember that about 70% of every dollar an insurance carrier receives goes directly into paying claims.
So why are insurance carriers able to remain profitable and why are their book asset sizes so impressive?
It is because you float your money to them. Before an insurance carrier provides coverage, they first collect your premium. Statistically, most people will not file a claim in their first insurance policy term. As time passes, the insurance company will be holding on to hundreds of millions and billions of dollars that have yet been needed to pay for a claim.
The insurance carrier is investing your money this entire time.
That's often how they can stay in business and maintain an acceptable profit ratio.
For now, this is the best model so far. Even though we all hate paying for insurance, it could easily be so much more expensive than it is.
We have customers paying less than $500 a year for their car insurance, that said, if they crash and injure another person to where they need a $44,000 surgery, the insurance carrier will pay the entire cost.
The current model has many flaws, but it's the best solution we have found to date and is widely accepted. Insurance regulations and laws help keep our assets and families safe from worst-case scenarios!