How do insurance companies make money?

In the insurance world we are mostly aware about the two words:

Premiums: The money paid by the policyholder for the insurance policy.

Claims: The amount an insurer must pay out when the policyholder met an accident included in the insurance policy.

Have you ever thought, what do the insurance companies like LIC do with the premium amounts. Since they are for profit organization, it is obvious they are here to make money to sustain in the market. Let’s explore what makes these companies profitable:

• Underwriting: The premium is generally higher than the company needs to pay during the claims. If your premium is ₹10,000, the claims you will make will be less than that. The remaining amount excluding the operating expense is the profit for the companies.
• Insurance Float: Lot of the premium amount is left over, which may get eventually be paid in future. Till then, the money is hold by the insurer. The money can be invested in markets, bonds etc. However, the amount earned on those investments only belongs to the company and its shareholders. For instance, Berkshire’s insurance operations have grown from $39 million in float in 1970 to $114.5 billion at the end of 2017. That’s a huge amount of cash and the profits keep on getting compounded. That’s why Buffet like Insurance companies a lot.

Like other industrial company, insurance companies don’t have to invest in R&D or machinery plants. That gives it the leverage. Mostly it needs to invest in branding so that people buy more of the premiums. That’s the reason we see so many ads of such companies.