Insurance Explained – How Do Insurance Companies Make Money and How Do They Work


This episode is brought to you by Skillshare. Get 2 months of Skillshare free and learn
new skills by using the link in the description. Well some of us may think that there’s nothing
more boring than attending an insurance conference on a wet Tuesday night in Boston. And we may well be right, but if we look back
to see how the industry began, it isn’t as dull as it might first appear. From swashbuckling pirates to a ferocious
fire that ravaged the world’s greatest city, insurance has had a colorful past. But how do those grey suits who sell insurance
really make money, and how do the inner workings of one of the most complicated fiscal models
really work? If these questions whet your curiosity, then
stay tuned to today’s episode of the The Infographics Show – Why do insurance companies
make money and how do they work? What is insurance? Well, insurance is a financial vehicle that
helps spread risk. By taking a risk from an individual, and spreading
that risk around a community, the individual is able to go about their personal or business
life without crumbling from financial ruin. In the simplest terms, let’s look at two
people. One is named Bob and the other Jim. Bob says to Jim, I’ll give you ten dollars,
but if I lose my cell phone, you’ll have to buy me a new one. If Jim agrees, then that’s insurance right
there. Insurance companies make money because they
evaluate the risk and decide whether it is worth the gamble. Jim believes that Bob probably won’t lose
his phone and he’ll therefore be ten dollars richer. If Jim finds 100 more people who are willing
to give him 10 bucks each to cover their phones, he has 1,000 dollars. If one of those 100 people loses their phone
and Jim pays 100 dollars as compensation, he still has 900 bucks. This insurance idea has been floating around
since the ancient Chinese and the Babylonians spread their shipping risks. But it wasn’t until around the 17th century
in London that modern insurance really took off. Merchant marine men and traders often hung
out in coffee shops in the business district of London, and while drinking copious amounts
of coffee, the idea of modern day insurance was born. Lloyds of London, the heart of worldwide insurance,
was developed inside one of these coffee houses and here’s how it worked. First, you have the client. Say the client has a ship that he is nervous
about losing to pirates offshore, or perhaps the vessel will be destroyed in bad weather. The client approaches an insurance broker. The broker looks at the ship, or pays someone
to look at the ship, and they decide how much the total value of that ship is worth. The broker then assesses the risk. He asks the client where he is traveling to
and what cargo he will be carrying. With all this information, he draws up an
insurance policy which he shows to the third person in the chain – the underwriter. For a cheaper premium, the underwriter may
exclude a few risks. And for a few more bucks, he may include some
extra risks. Now there are normally lots of underwriters
approached, but one will be the lead, and the lead underwriter, like Jim, will normally
take the largest proportion of the risk and sign his name first on the policy document. He is known as the underwriter, as he writers
his name under the risk on the insurance policy. The lead underwriter makes the major decisions
when it comes to accepting the policy, and will be the main man to agree to any claims
on the policy. Once the terms of the policy are agreed to,
it is made legal, and the client is happy and the ship sets sail – but not before paying
the insurance premium to the broker, who will take about 10%, and pass the rest on to the
underwriter. But what should happen if pirates board the
ship, steal the cargo, and burn it at sea? Well, the client (if he is still alive, if
not, a representative of the client) will speak to the insurance broker and the broker
will visit with the lead underwriter and tell him the bad news. The rest of the underwriters (there may well
be as many as 20 on a big policy) are told the news and then the broker must negotiate
the best claim settlement for the client or his or her representatives. The underwriters pay the money to the broker,
who passes it on to the client, without deducting any cut. The broker makes his money once the premium
is paid, and will help negotiate the best claims for his clients through gentlemanly
honor and the prospect of future business. Now it may not be all bad news for the Underwriter. If he is wise and not greedy, he may have
reinsured the policy. Reinsurance puts the underwriter in the position
of the client. The underwriter sells the policy onto another
underwriter or firm of underwriters, while retaining a share of the premium. Confused yet? Think back to Jim and his phone insurance. If Jim resold his 10 dollar phone policy for
9 dollars, rather than the 10 he received, then he gets to keep a dollar each for each
of his 100 clients, meaning he has 100 dollars completely risk free. Similarly, much of the modern day insurance
that flows through Lloyds of London is reinsured out of the building to smaller insurance companies
all across the world. So what starts as a simple agreement between
the client and the broker (or Jim and Bob) is spread across a business community who
each stand to profit from the premium or take a cut of any losses. This is how insurance works – by the spreading
of risk over communities. So that is how maritime insurance was born. It was developed through the need of ship-owners
to carry on in business should they lose everything whilst at sea. But what about property insurance? Well around the same time, 1666, the great
fire of London devastated the city where modern day insurance was born, and famous architect
Sir Christopher Wren, in his great London redevelopment project in 1667, made sure to
include an insurance office in his new plan. Now property insurance is commonplace with
most homeowners having a policy in place. Also medical, life, travel, car, and dental
insurance are all commonly held policies. Even pet insurance is a major insurance business
nowadays. Over time the business model has evolved. Modern day insurance companies are fiercely
competitive, which is good for you, the client, as polices are priced at their lowest possible
point. Companies now look to write as many polices
as possible to create a financial pool. They take the premium from thousands of policies,
and invest that money in another financial product. So the insurance underwriter may pay out more
claims than they make in policy premiums. But they have invested all those premiums
in a high interest investment scheme, so they make their money outside of the original insurance
product. Insurance in this example is a way of creating
cash flow to be used in more lucrative investments. And if you are wondering what other creative
and lucrative ways there are to make more cash, take a Skillshare class called “How
to generate Passive Income.” Skillshare is an online learning community
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already members, and support The Infographic Show at the same time, by going to Skillshare.com/
infographics9 or clicking the link in the description, and start learning today! So, what do you think? Do you have insurance to protect against the
unexpected? Do insurance companies charge too much? Is it all just a scam? Let us know your thoughts in the comments! Also, be sure to check out our other video
called US Teachers vs UK Teachers! Thanks for watching, and, as always, don’t
forget to like, share, and subscribe. See you next time!

100 comments

If insurance is not a scam, than why do people pay one company for 20 years and then get dropped after their first accident?
How can someone move from the coast of Southern California to a rural area in Oklahoma and have their insurance rates go from $120/month to $300/month on a car that was 12 years old at the time (2001 Chevy Aveo in 2013)?
If the average driver only has 3 to 4 minor car accidents in an entire lifetime, why are we paying such high prices per month?
I drive a '97 GMC Sonoma with a clean driving record, no accidents, yet I still pay $130/month. After 1 year of insurance payments, I've paid more than the cost of the car itself. AND THAT'S JUST LIABILITY! How is this NOT a scam?
On top of all that, the state government forces you to buy insurance from private companies by making insurance a MUST HAVE to drive, but not offering any kind of affordable public insurance.

You didn't answered my long living question.
What will happen to the company if something disaster happened to the 50% of the clients??? 🤔🤔🤔

This is a very confusing way of explaining this. How do insurance companies make money? Well in UK the car insurance industry has an annual income of more than 13 billion pounds in cash. To put that in perspective, its around double the cost of building and maintaining every road in UK. That is the cost of car insurance alone. All insurance companies offer house, life, bussiness, investment…etc insurance as well. Which means the annual turn over for the industry is likely several times more than that estimate. Since insurance companies often own a lot of shares, properties and investments in other industries, their borrowing capacity in the banks is five times their total balance income. The insurance industry is worth several trillions in profit basically. All that income for an industry whose only expenditure is in call centre staff which is far lower since its mostely donw online.

Its no wonder that the CEO of the medium sized insurance company like the NFU makes double the salary of the highest paid foodball player like Messi and Ronaldo.

How do insurance companies make money? The short answer is by doing feckall…

They dont pay many of the people in case of disaster,,,those bastards are just here to make rich more richer and poor more poor,,,thats why in islam this type of insurance is not allowed

why not just put the money on side that you would pay to insurance company and if nothing happens you still got the extra money

Wow very useful video. I love this channel because of the graphics, voice quality, & content! Please make more videos about business or self improvement! Which can be used in real life

Any other business that operated like insurance companies would be considered fraud. Collect premiums for years then provide nothing in return. The only other legal business like this are gambling but at least you have a chance to win and they make no guarantees. Spent years working in it never again.

I've paid more in insurance than I've collected. But every time I've collected, I wasn't in a postilion to comfortably pay it outright myself. I like to tell myself I could have just saved the money I was paying for those situations. But my Savings account is like

" Come on buddy…"

Like your vids but you didn't fully explain how they make money. So here it is.
They make money by having a team of mathematicians and statistic experts (actuarial science majors), they create formulas based off of previous losses. Then they make the cost of the policies more than the statistical experts predict to lose in a given year.

Stop paying all of the insurance you pay (take care of yourself and your loved ones. Now picture and carefully. You work 8 hours a day or however long. You breaking your back all day and the Companies getting richer because of you. Is that fair to you? I don't think so. The best you can do is pay from your own pocket if got hurt or ill. if you have a low income start living more carefully, and don't be an idiot like those people on YouTube funny fails compilations. Watch your steps. Eat healthy no fast food period. Second, stop paying car insurance. Drive more carefully. Got in the accident and damaged someone's car? pay from your wallet. The more you crush the more the insurance go up. Now conclusion. You drive and you got pulled over, right? Whats the first thing that cop asks of you? The license, registration and insurance. All of these things you pay for. Its in your head that tells you, you have to buy those things so they can get richer. If we all stop paying all the shit we will defeat the system all together. We don't need them they need us. peace

Hey everyone! If any of you need REAL information about life insurance, please contact me. There is something for everyone, even if you work at McDonalds. Simply email me your name and phone number. You're just receiving information, no pressure. Email: [email protected] .com

Phones cost $900, not $100. Anyone who buys $100 phones wouldn't buy the insurance on it. I only insure expensive phones.

Why are there no women in this video???? This is the kind of thing that gives girls the idea that only men do business, buy insurance, think about money… what kind of backwards world do these video designers live in? Women are not only more likely to be the primary caregivers in a family. Increasingly, they are primary breadwinners, too.

Four in 10 American households with children under age 18 now include a mother who is either the sole or primary earner for her family, according to a Pew Research Center analysis of Census and polling data released Wednesday. This share, the highest on record, has quadrupled since 1960.

They take your money and invest those in shares as market movers ,also invest in other sectors like real estate,loans,bonds,gold etc

But I didn't understand
How I he got 1$ profit
My logic
If he had sold it for 11$ he would have made profit of 1$
But he sold it for 9 $ it's a loss of 1$ isn't it?

Insurance companies are like casinos, they always win. The odds are in their favor and no other legal business can take your money and give nothing in return. Ones and threes on the dice every time.

First, they pool the money to pay claims. Second, insurance companies pay for expenses involved in selling and providing insurance protection. Third, insurance companies invest money. Earnings from investments help keep down the cost of insurance to policyholders.

It’s easy. You pay them $100 a month for 10 years that’s $12,000 for car insurance. You then hit a deer and it causes $500 in damages you then have to pay your insurance company $100 so they will pay $300 and you will have to pay the other $200. And that is how they make money

Just go to uk, open an insurance company for cars for new drivers, charge thousands, make tons of profit, and there you go, great business plan right there.

I started working in insurance at 17 and the company I work for writes Lloyd’s so it’s cool to see how many views this has! Although I have only been in insurance for a year, I can’t stress how much it is not a scam! I’d like to hear you say that after you go to the hospital in a different province and get a bill in the mail … lol

Probably worth adding that the investments tend to be conservative (bonds, blue Chip stocks) because insurance claims can be so volatile (earthquakes, tsunamis, market crashes) and your final cost is never really known.

Warren Buffet loved long tail claims (liability insurance) because you pay the claims latter meaning more money to invest and if they underwriter was prudent then the profit is essentially free money to invest.

Insurance is a scam. Its like gambling they have a mathematical formula that they use to make sure they make money overall. Even worse the government requires you to have it. Which is unconstitutional.

Insurance is basically like a casino or lottery except you are gambling to avoid a huge loss rather than make a huge gain.

All insurance companies make money the exact same way….they collect your premiums and give excuses why they can’t pay your claim, cover your MRI, send you to a specialist, cover your car, or repair your home. Scam all f*cking day.

The insurance company are like casinos takes the money makes the money , no matter how big is the risk is, they will never make a loss . We the insured are always losing money every year .And even if you need to make a claim then you still need to pay them next year with extra charges and high premium.

So insurance companies make money by taking money and being paid by the people who gave them money, and give them back to its clients? I guess that's a win-win situation.

This was very informative. I’ve always wondered how medical insurance companies pay & earn money, I once assumed that people don’t get sick enough including myself.

What would happen if a big group of people bought insurance, and the following day (or whenever the insurance becomes active), something happens that trigger they payout, but the company is unable to pay. Would the company declare bankrupt? Customers able to sue? They can't do anything about it?

Hey Infographics Show, just wondering, where are the sources for this episode? It's missing from the description?

This is my only experience with insurance company:
"We're supposed to help OUR people, starting with our stockholders, who's helping them out?? HUH?"

Sounds to me like insurance is for poor people or some partaking in risky activities for a short period of time

What if the person who provides the insurance, the Brooker, doesn't have enough to pay to replace the lost phone

Thing is, you the customer are still losing money either way, if nothing bad happens, your still losing money. If something bad does happen, you still lose the money and even more money if the claim contract didn't exactly match the problem you just had. Did I mention the insurance will force you to pay up even more just because they actually had to step up and do what there were paid to do?

I Dominic have got a feeling of transforming the insurance industry. All I need is to be given a chance.. Thanks

Its law to have it yet they make profit off it and try everything not to pay out
What a conflict of interest

Allianz Global and Corporate Specialty, is an errant employer, please avoid their insurance products at all cost! They work with brokers and Standard Chartered Bank, do not allow errant employers to earn profit into their fat pockets!

Short answer they take your money and buy more money and they buy so much that if you do have an accident it doesn’t matter because they can pay for it

I'm a professional driver for one of the biggest shipping companies in the world, I completed driver training, I have a clean driving record, and i pay $4.5k/year for car insurance. What do I drive? A Benz? A Lamborghini? No…. a base model ford focus…

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