How do Insurance Companies Make Profits

I’m sure you all might have this question or trying to know how Insurance companies make profits right?

Ok in this post I will tell you all that how Insurance works and how Insurance companies make profits.

Before getting to know this we will first know

What is Insurance?

In simple Insurance is protection against your loss.

The loss can be in any form such as loss of health, loss of wealth or loss of life so the insurance is basically a protection against the loss which is provided by an insurance company.

The insurance company which provides protection against the loss collects the money from you in terms of premium.

These premium are very less compared to the insurance amount.

Now let’s understand with few examples

How Insurance Companies Make Profit

Let’s say for example if the claim amount is 1 lakh and the sum insured is 1 lakh then the premium amount would be very less.

In other words, as illustrated in the image below these insurance companies make a pool of money collected from the people in the form of premium amount from this pool and pay the people who make a claim.

How Insurance Companies Make Profit

So this is the basic structure of insurance companies.

The biggest revenue for any insurance companies will be the premium and the biggest expense will be the claims, Commission for the agents and operational expenses such as salaries & administration expenses.

So let’s understand this with a simple calculation

Say we have 200 people who enrolled in insurance policies and the premium amount is Rs. 2000

200 X 2000 = 4 Lakhs

Now let assume if the sum assured is 1 lakh and if at least 3 people out of 200 people make a claim then the expense become 3 lakhs.

And let us assume the other expenses say commission, operational and administration will be 1 lakh, now you all might be thinking the income amount = expense amount and what is left for the insurance company right?

But this is not true, now comes the game changer. The income 4 lakhs which was invested by people as premium will be invested which gives a minimum return of Rs. 30K to 35K which will be the profit for the insurance company.

So this is how Insurance companies make profits.

How Much Profit do Insurance Companies Make

As I said earlier, It depends on the insurance company that where they actually invest the total money collected as premium

They can invest the total money in the stock market, bonds, real estate, etc.. The returns which they get can be a minimum of 15% to 20% depending on the type of investment the insurance company makes.

Types of Insurance

Below are some of the common types of Insurance which the Insurance companies sell

Types of Insurance

So friends I personally advise everyone to get insured.

Whether it can be Life insurance, auto insurance, health insurance or even mobile insurance because when I bought a new phone I did not get it insured and when I lost my phone I was not able to get back anything.

So friends please do not make the mistake that I did and repent later.


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