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Pricing and Assuming Risk

Interest earnings and revenue, reinsurance, evaluating insurers.

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How Do Insurance Companies Make Money? Business Model Explained

main business model for insurance companies

Insurance companies base their business models around assuming and diversifying risk. The essential insurance model involves pooling risk from individual payers and redistributing it across a larger portfolio. Most insurance companies generate revenue in two ways: Charging premiums in exchange for insurance coverage, then reinvesting those premiums into other interest-generating assets . Like all private businesses , insurance companies try to market effectively and minimize administrative costs .

Revenue model specifics vary among health insurance companies, property insurance companies, and financial guarantors . The first task of any insurer, however, is to price risk and charge a premium for assuming it.

Suppose the insurance company is offering a policy with a $100,000 conditional payout. It needs to assess how likely a prospective buyer is to trigger the conditional payment and extend that risk based on the length of the policy.

This is where insurance underwriting is critical. Without good underwriting, the insurance company would charge some customers too much and others too little for assuming risk. This could price out the least risky customers, eventually causing rates to increase even further. If a company prices its risk effectively, it should bring in more revenue in premiums than it spends on conditional payouts.

In a sense, an insurer's real product is insurance claims . When a customer files a claim, the company must process it, check it for accuracy, and submit payment. This adjusting process is necessary to filter out fraudulent claims and minimize the risk of loss to the company.

Suppose the insurance company receives $1 million in premiums for its policies. It could hold onto the money in cash or place it into a savings account , but that is not very efficient: At the very least, those savings are going to be exposed to inflation risk. Instead, the company can find safe, short-term assets to invest its funds. This generates additional interest revenue for the company while it waits for possible payouts. Common instruments of this type include Treasury bonds , high-grade corporate bonds , and interest-bearing cash equivalents .

Some companies engage in reinsurance to reduce risk. Reinsurance is insurance that insurance companies buy to protect themselves from excessive losses due to high exposure. Reinsurance is an integral component of insurance companies' efforts to keep themselves solvent and to avoid default due to payouts, and regulators mandate it for companies of a certain size and type.

For example, an insurance company may write too much hurricane insurance, based on models that show low chances of a hurricane inflicting a geographic area. If the inconceivable did happen with a hurricane hitting that region, considerable losses for the insurance company could ensue. Without reinsurance taking some of the risks off the table, insurance companies could go out of business whenever a natural disaster hits.

Regulators mandate that an insurance company must only issue a policy with a cap of 10% of its value unless it is reinsured. Thus, reinsurance allows insurance companies to be more aggressive in winning market share , as they can transfer risks. Additionally, reinsurance smooths out the natural fluctuations of insurance companies, which can see significant deviations in profits and losses.

For many insurance companies, it is like arbitrage . They charge a higher rate for insurance to individual consumers, and then they get cheaper rates reinsuring these policies on a bulk scale.

Investopedia / Hilary Allison

By smoothing out the fluctuations of the business, reinsurance makes the entire insurance sector more appropriate for investors.

Insurance sector companies, like any other non-financial service, are evaluated based on their profitability, expected growth, payout, and risk. But there are also issues specific to the sector. Since insurance companies do not make investments in fixed assets, little depreciation and very small capital expenditures are recorded. Also, calculating the insurer's working capital is a challenging exercise since there are no typical working capital accounts. Analysts do not use metrics involving firm and enterprise values ; instead, they focus on equity metrics , such as price-to-earnings (P/E) and price-to-book (P/B) ratios . Analysts perform ratio analysis by calculating insurance-specific ratios to evaluate the companies.

The P/E ratio tends to be higher for insurance companies that exhibit high expected growth, high payout, and low risk. Similarly, P/B is higher for insurance companies with high expected earnings growth, low-risk profile, high payout, and high return on equity. Holding everything constant, return on equity has the largest effect on the P/B ratio.

When comparing P/E and P/B ratios across the insurance sector, analysts have to deal with additional complicating factors. Insurance companies make estimated provisions for their future claims expenses. If the insurer is too conservative or too aggressive in estimating such provisions, the P/E and P/B ratios may be too high or too low.

The degree of diversification also hampers comparability across the insurance sector. It is common for insurers to be involved in one or more distinct insurance businesses, such as life , property, and casualty insurance. Depending on the degree of diversification , insurance companies face different risks and returns, making their P/E and P/B ratios different across the sector.

International Risk Management Institute. " Underwriting ."

Insurance Information Institute. " Reinsurance ."

main business model for insurance companies

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Insurance Companies Business Model

We all are surrounded by different uncertainties and risks in our life. Whether a celebrity or a normal human being; everyone lives in the fear of losing valuables. People have different worries like health issues, financial loss in business, death loss, job insecurity, etc. Apart from these worries, another fear is related to property loss and natural calamities i.e. earthquake, floods, famine, fire, drought, etc. In organizations also, both employees and employers are worried about different risks, like employees have a risk factor of losing jobs and employers for the wellbeing and physical safety of employees. So, we can say that everybody experiences risks and uncertainties at some point in their life.

Insurance offers a way to provide protection from above different financial losses. It is considered as one of the mediums for providing not only financial security but also emotional and materialistic security. Insurance supports by protecting us from uncertain possible risks i.e. accident, fire, sudden death, major health-issues, burglary, etc. Insurance can be broadly classified as Life Insurance and General Insurance.

• Life Insurance: It is considered as a contract that provides compensation in monetary terms in case of disability or death of a person. Even a few life insurance policies are composed to provide post-retirement financial security or for a fixed period. We borrow life insurance policy by making a lump-sum payment or periodic payments i.e. Premium to an entity that provides insurance i.e. “Insurer or Insurance Company”. In lieu of the premium, the insurer or insurance company assures to compensate an assured amount to the family in case of disability or death or at a defined time. So, we can say that life insurance secures families by providing financial security even in the sudden death of a family member.

• General Insurance: It is a contract that provides financial security in the form of compensation on other losses except for death. These financial losses can be related to different liabilities like travel, health, vehicle, house, etc. Through this, insurance companies are liable to pay a sum assured of the compensation that covers vehicle damage, financial loss at the time of travel, medical expenses while taking treatment on health issues, financial loss due to fire or theft or natural disasters, etc. General Insurance is mainly of 5 types i.e., Health insurance, Vehicle insurance, Travel insurance, Home insurance, and Fire insurance.

A Brief Background

The evolution of the Insurance concept and Insurance business happened long back when businessmen throughout the world used to travel from one nation to another for business and trade purposes. The primary and cheapest way of transport was to utilize waterways. Boats and ships were the transport medium for shipping stock and inventories. But often boats containing cargo were drowned or stolen by pirates or lost. So a group of 10 merchants or businessmen looked for a solution for bearing risk due to the above loss of inventory and boats. As a solution, each of them contributed 10% worth of inventory or stocks, and the same was collected in a bag. After the contribution of each business member, the bag had enough money to compensate any ship owner who lost his ship to prevent any financial or mental loss. So, this act of these merchants is considered as commercial insurance in which they were insuring the risk on a mutual basis by money pooling (premium) and further providing that money as compensation to the merchant who suffered the loss (sum assured).

Business Model of Insurance Companies

The business model of an Insurance company involves an agreement or contract between the insurance company (insurer) and people who are insured (customer or insurance policyholder). The base of the business model of insurance companies revolves around prediction and diversification of risk. It is a risk-sharing model in which risk is pooled from individuals and redistributed among a large group of people. Before discussing the business model of Insurance companies in detail, let’s first have a look at the “Working mechanism of Insurance business”.

Business Model Canvas of Insurance Companies (Including Life Insurance Companies)

Different elements mentioned in the above business model canvas of Insurance Companies are as under:

A) Value Proposition

Following is the value proposition of insurance companies.

  • Insurance companies provide different insurance policies to cover various unforeseen events to enable businesses and individuals to disburse their daily activities smoothly. These policies remove the future possibility of any big and unaffordable potential loss by providing security and mental peace. Also, losses of the few people are distributed among many.
  • Different insurance policies are offered by insurance companies to cover various types of risks like home insurance, life insurance, vehicle insurance, health insurance, etc.
  •  Businesses and companies can also take benefits of various insurance plans like Worker’s compensation, Property insurance, Group mediclaim, Group personal accident insurance, Fire insurance, etc. to save the interest of their employees and business assets in hard times or unexpected losses.
  • Insurance companies cover risks of customers against old age, death, illness, disability, etc. They provide various additional benefits or services along with core insurance products aimed at risk prevention, fast handling of claims, etc. This also includes providing health advice or cyber-security advice.
  • Insurers offer various saving plans for long-term benefits, like pensions. The products offered by the insurance companies are mostly the combination of investment and protection against different risks. Thus, customers get the advantage of both returns on investment and life risk cover.
  • The products of Insurance companies have guaranteed minimum returns. So, it ensures people, that their savings are safe. Even in fluctuations in stock markets, customers will still get the money as agreed at the defined time.

Value Proposition Especially Offered by Life Insurance Companies

The chart depicts the value proposition offered by life insurance companies

  • Financial Security (peace of mind): – In case of death: Life insurance companies offer great peace of mind by ensuring financial safety to the family in case of demise of life insurance policyholder. – In case of health issues or major disease/illness: The major part of the income of Indians is used in healthcare and medicines. There are great chances of no earning or income during treatment in case of suffering from a critical or major illness. Life insurance companies play a significant role during this time by providing financial protection to fulfill family needs, medicine, and treatment needs. For example, ICICI Prudential life insurance has an ICICI Pru iProtect Smart Plan that includes ICICI Prudential smart health cover for the critical illness of worth Rs. 10 lakh cover and for 15 years.
  •  Secure future of children: Life insurance companies encourage savings or funds for the education of children. A child insurance plan is there to fulfill educational needs of children. These policies generally come under ULIP (Unit linked insurance plan) that facilitates the increase in investments and educational support. Such as, a parent at the age of 35 years takes a 15-year child insurance plan with Rs. 10 lakh sum assured and saves Rs. 1 lakh on annual basis for the purpose of higher education of a child. In case of unfortunate death of the parent at the age of 40, Rs. 10 lakh amount will be handed over to the child for fulfilling the requirement of immediate educational cost. For example, ICICI prudential life insurance has ICICI Pru Smart Life plan that gives the additional benefit of waiving off the remaining premium amount in case of death of parent that also without intact of financial protection cover.
  • Avoiding loan burden by wealth creation: Life insurance companies also offer few life insurance plans that provide the medium for wealth creation. These plans or policies provide benefits of life cover and great returns by investing the premium of policyholders in various beneficial investment categories. This helps in minimizing the burden of taking and repaying loan for financial needs by encouraging savings and enhancing wealth. For example, ICICI Pru Signature which is a ULIP plan of ICICI Prudential life insurance offers such benefits.
  • Retirement benefits: In the old age, everyone wants to be free from all financial burdens and work pressures to enjoy the retirement period. This can be peaceful if there is a stable monthly income or pension. As more people are working in private sectors where pension benefit is not available or very rare, so retirement seems like a burden or pressure. To avoid such worries on retirement, life insurance companies offers retirement plans through which retired people are able to get a pension and can live their life without being financially dependable on others. These retirement plans provide regular pension to a retired person and his/her spouse. For example, if a 60 years old person buys ICICI Pru retirement plan i.e. Immediate Annuity-retirement plan of Rs. 1 crore then he/she can receive Rs. 61k per month as retirement pension for the rest of the life.
  •  Tax benefit through tax savings: Tax benefits are also offered in Life insurance plans by insurance companies. The premium paid by the policyholder comes under the tax deduction of section 80C in the Income Tax act. So, up to Rs. 1.5 lakh annual premium is a deductible amount from gross income that lowers the tax outgo. Moreover, the maturity insurance plans are totally tax-free.

B) Customer Segments

Different customers of Insurance companies (including life insurance companies) are

  • Household customer segment: This includes self-employed people, retired employees, and salaried class customers
  • Trade sector: Different small and large businesses are included in this
  • Industrial sector: Both public and private industries are also customers of Insurance companies
  • Institutes: Various universities, schools, colleges, and institutes fall in this customer segment
  • Rural sector: This segment is categorized as per age i.e. kids, youth, old age, etc. and gender-wise segment i.e. Men and Women.

C) Key Partners

The key partners of insurance companies are:

  • Life Insurance and general insurance companies have network partner companies to support them in their different operational activities. The key partners of insurance companies are categorized as below: Channel and distribution partners: This includes third party intermediaries of insurance companies like agents, brokers, banks, independent consultants that work on the behalf of insurance companies in providing products and services of them and also, expand the market reach of insurance companies. Different banks and insurance companies have a partnership for selling insurance products of insurance companies to clients of banks. This partnership is termed as Bancassurance.
  • Vendor and suppliers as partners: This includes suppliers of technologies, services, equipment to support the main operations of insurance companies. For example, ICICI Prudential Life Insurance has tie-up with Paytm for marketing and selling its product i.e. ICICI Pru iProtect Smart (a protection product) using the Paytm app. Similarly, the company is in partnership with Airtel Payment Bank to provide easy and fast access to savings and life insurance plans of ICICI Prudential to the customers of Airtel Payment Bank.
  • Strategic and Alliance partners: This includes different companies that have a tie-up with insurance companies for projects related to the marketing and branding of insurance companies.
  • Community and Social partners: Various charitable and non-profit organizations are partners of insurance companies for community and social projects.

D) Key Resources

These are the key resources of insurance of insurance companies.

  • Insurance agents and brokers: The insurance agents and brokers are the main resources of Insurance companies, especially life insurance. These are the 1st point of contact for customers who are looking for insurance. These agents and brokers facilitate customers in selecting the best insurance cover by providing all necessary information. Insurance agents usually work for a particular insurance company and sell the insurance products of that company only. Wherein, insurance brokers serve customers who are looking for insurance and so these brokers are associated with multiple insurance companies to sell their products.
  • Online portal or Website: Insurance companies have their own website that contains all necessary information about their products and services for different types of customers according to their needs. People can apply directly to these websites for insurance cover. Also, customers can apply through the website of Insurance agents, brokers, and third parties.
  • Mobile App: Various life insurance companies have their own mobile app to facilitate customers with quick and easy apply, access for insurance, and related services. For example, ICICI Prudential Life Insurance has a mobile and tablet app i.e. ICICI PruLife for the purpose of online sourcing and servicing of life insurance policies. Customers, Advisors, Employees, and Sales Partners of the company can access and use the app.

E) Key Activities

The main activities of Insurance companies are as below:

  • Marketing: This includes primarily marketing activities like advertisement and promotion of insurance-related products and services. Different agents and Brokers are the sources to sell and advertise most of life or health insurance policies. All big groups in the insurance sector have their own websites for promoting the product features of insurance companies.
  • Underwriting: Insurance companies are involved in underwriting which is the process of categorizing the potential insurance policyholders into the applicable risk classification. The purpose of underwriting is to charge the appropriate price or rate.
  •  Administration: Insurance companies do various administrative activities once the insurance policy is sold out and underwriter approves it like establishing records, collecting premiums, answering queries of customers, and various other administrative jobs. Administration includes management of various other functions i.e. accounting, customer service, information systems, personnel management, and office administration.
  • Investments: Different Insurance companies have their own investment firms (e.g. mutual funds firms) that perform tasks related to investing the premium in the capital market in order to gain the best ROI (return on investment) for providing security to policyholders.
  • Reinsurance: Insurance companies are also involved in reinsurance activities through which they transfers either complete or a part of its risk to another insurance company under an insurance contract.
  • Legal and Regulatory Issues: Insurance companies have lawyers who are involved in various legal activities like drafting insurance contracts, interpreting provision of contracts at the time of presenting claims, defending the insurance company in lawsuits, communication with regulators, etc.
  • Claims adjustment activities: This includes activities related to providing payment to insured customers on losses.

F) Channels

These are the channels of insurance companies.

  •  Websites: Insurance companies have websites that display information related to their products, services, and other activities. The website of the insurance company provides an online medium for making online payment of premium, getting insurance proof, filing a claim and to monitor its progress, etc. It includes detail of various policies that an insurance company offers to its customers along with specific provisions.
  •  Mobile App: Insurance companies also have a mobile app using which customers can access the information related to their policy, file a claim, and can track their progress, etc.
  • Parent company or Banks: Few of the Insurance companies have their own banks as a parent channel for initiating insurance activities like HDFC Life Insurance has its parent company i.e. HDFC Bank.
  • Individual agents and brokers: Insurance companies sell and promote various insurance products and services through the channel network of brokers and agents. For this, insurance companies provide a commission to them.
  • Branches: Insurance companies have different branches at different locations of the country which acts as a channel for insurance business activities. These branches also sell and promote insurance products directly other than brokers or agents.
  • Social media: Social media like Facebook, Linkedin, Twitter, Whatsapp, etc. are also key channels of Insurance companies where they advertise and promote their products and services to generate sales.
  • Call centres: Various insurance companies take services of call centers of BPOs for selling and promoting their insurance products.

G) Customer Relationship

The insurance companies offer the following customer services.

  • Insurance companies provide a wide range of services to its customers for superior customer relations. Through the online portal or websites of these companies, customers can manage various activities like bill payments, account information, access of resources, and claim submission directly without any hassle of interacting with sales or service representatives.
  • Insurance companies offer continuous support to customers by providing various online resources such as answering FAQs (frequently asked questions) and guides, direct customer support assistance through the dedicated support and service staff of the insurance companies to provide guidance and resolve queries via email or over the phone call.

H) Revenue Streams

The main resource of revenue/income of Insurance companies (including life insurance) is the premium paid by people who have purchased insurance. These premiums can be lump-sum i.e. all payment at once or in instalments or regular intervals i.e. monthly, quarterly, annually, etc.

Other than charging premiums for insurance coverage, insurance companies also reinvest these premium amounts in other assets that generate interest income.

I) Cost structure and Competitor Review

Different costs that revenue of Insurance Company (including Life Insurance Company) covers are as under:

  • Losses and loss-related adjustment expenses: A life insurance company keeps a portion of its reserves for unpredictable future losses, investigation cost, and loss adjustment costs. These reserves are kept by estimating the losses an insurance company may experience in the future. Loss adjustment cost or expense is the cost bore by the insurance company during the settlement of claims. So, they have claim representatives who investigate claimed losses. As the company has to pay them for the services, so these expenses come under loss-related adjustment expenses.
  • Acquisition cost: These expenses mainly include marketing-related costs, like advertisements, commissions of insurance agents and brokers, etc.
  • Administrative expenses : These are considered fixed costs like office equipment and computers, etc.
  • Taxes: Insurance companies are also liable to pay taxes and are considered as expenses.

Competitor Review

  • Insurance companies compete with risk retention groups, government, and also, self-insurance. The government mostly facilitates insurance cover for risks like floods, earthquakes, etc. States also provide insurance in few places like Employee state insurance (ESI), Worker’s compensation, etc.
  • Different RRGs (Risk retention groups) are also competitors of Insurance companies that provide coverage for specific liability risks like malpractice in medical.
  • Different large organizations or businesses that self-insure for employee benefits like health coverage; are also considered as competitors of insurance companies.

Revenue Model of Life Insurance Companies

Let’s have a look in detail that how life insurance companies generate revenue:

  • Income from Underwriting: Underwriting revenues are those that are derived from subtracting the amount paid out for claims/final settlement from the actual amount that life insurance companies collect through premiums by selling insurance policies. For example, in a particular year, a life insurance company earned revenue of Rs. 1 Crore through premiums by customers for insurance policies. It further paid Rs. 50 Lakh as settlement amount or claims. So, we can say that the profit earned by the company i.e., Rs. 50 Lakh (1 crore-50 lakh) would be underwriting income for that year.
  • Income from Investment: Lots of money is being earned by life insurance and general insurance companies through investment income. The premium amount paid by insurance customers is collected and invested in financial markets by insurance companies. Generally, the amount is invested in stocks, bonds, different other businesses, and in other insurance companies as well under few circumstances. So, the residual income generated from investing the premium amount in capital or financial markets is considered as income earned from investment. Life insurance companies prefer to invest the premium amount to gain the advantage of returns rather than keeping the money in idle stage until they receive actual claims for settlement. The insurance companies invest money in both low and high-risk investment mediums, like investing in securities of fixed income at lower risk and investing in equity markets to gain appropriate returns. For example, HDFC Life Insurance has various ULIP (Unit linked insurance plan) investment plans for customers for better returns like HDFC Life Click2 Wealth, HDFC Life Sanchay plus, HDFC Life Sanchay Par Advantage, etc.
  • Cancellations of cash value: As life insurance companies invest the premium amount of policyholders, so the customers who have whole life insurance policy demand for the cash values or money that is earned by dividends and investment from the investment plans of life insurance companies. For this, even they also prefer to close or surrender their life insurance policy. This provides an opportunity to earn profit to the insurance companies as all the liabilities of their side ends once the cash value of money is paid to customers. By keeping the entire already paid premium amount, insurance companies provide interest income to customers on their investments and remaining cash they keep with them. So, cash value payouts are considered as a financial windfall for life insurance companies.
  • Lapse of coverage: When customers are unable to pay the premium amount or miss the premium payment then it is considered a life insurance policy lapse which is a profitable part for insurance companies. In this scenario, the life insurance companies are not liable to pay any claim or death benefit or give insurance coverage to the insured customer. This is one of the jackpots for insurance companies as they keep the entire previous paid premium.
  • Loss Ratio: Insurance companies use different statistical tools to take an estimate of the final claim ratio for a specific year. This ratio is termed as loss ratio which includes both reserved, paid total losses, and all operating expenses. For example, let’s say Rs. 60 is paid by a life insurance company in settlement of claims against the collected premium of every Rs. 100; the loss ratio is 60% and the profit ratio is 40%. This 40% profit ratio is included in some expenses i.e. operating costs of the company and the rest part of it will be considered as the net profit of the insurance company.
  • Premium loading: Life insurance companies also make a profit or extra income through premium loading. Some Insurance policyholders are considered as high-risk customers like customers into risky work i.e. Army, Pilot, Air Force, etc. or people suffering from critical diseases or chain smokers or drinkers, etc. In such cases, insurance companies may raise the premium for policyholders, and this increased premium is considered as premium loading.

Insurance plays a significant role in the economy of India and other countries. It supports the economic activities of the country by assisting people and businesses to cope with their risks. The business model of insurance companies facilitates organizations to focus on their business functions and effective utilization of resources. Insurers earn revenue mainly through underwriting income and investment income. Most of the assets of insurance companies are financial investments, mainly listed shares, government bonds, commercial property, and corporate bonds.

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How Do Insurance Companies Make Money?

The insurance company revenue model revolves around a claimant receiving compensation in the event of an accident, illness, death, or damage to an asset resulting from theft or a natural disaster. In return for continual insurance cover, the company charges a regular fee – otherwise known as a premium. In essence, insurance companies make money by carefully considering the risk of each policy. They bet that the holder will continue to pay for insurance coverage and never be required to make a claim.

Table of Contents

Insurance company revenue generation

Most insurance companies make money via underwriting, investment income , and reinsurance.


Underwriting revenue can simply be defined as the money that is left over after the company subtracts the cash paid out in insurance claims from the cash collected via premiums.

Consider the example of a fictitious car insurance company that earned $15 million from insurance premiums in one financial year while paying out $9 million in claims over the same period. This means the company earned a profit of $6 million on its underwriting revenue .

Insurance companies devote a lot of resources to ensuring they make a profit from underwriting revenue . Applicants are vetted on a range of criteria including gender, age, medical history, claim history, and credit history. Whatever the criteria evaluated, remember that the company assesses each applicant according to the risk of them making a future claim.

If the risk level determined by an algorithm is too high, the company may raise the price of the premium or avoid doing business with the applicant altogether.

Investment income

If we return the previous example of the car insurance company with $6 million in underwriting profit , one could make the argument that the cash would be underutilized sitting in the company’s bank account.

To maximize returns, insurance companies invest their profits in the financial markets. They tend to have more money to invest than companies in other industries since none has to be spent creating or manufacturing physical products. Common investments include corporate bonds, treasury bonds, and interest-bearing cash equivalents.


Some companies also sell reinsurance to other insurers. These insurers purchase reinsurance to protect themselves from excessive losses in situations where they are overly exposed to an event that could lead to insolvency.

For example, a company may run into financial difficulty if a severe hurricane causes widespread damage to infrastructure and a subsequent increase in claims over a short period of time. Indeed, reinsurance is a lucrative industry , with climate change and COVID-19 related drivers expected to grow the global reinsurance market to around $556 billion by 2025 .

Key takeaways:

  • Insurance companies make money by analyzing the risk of an individual policy. Generally speaking, they bet that the policyholder will continue to pay for insurance coverage and never be required to make a claim.
  • Insurance companies make a profit by collecting more in insurance premiums than they pay out in insurance claims. Strict criteria are used to determine the risk of each applicant making a claim in the future, with high-risk applicants subject to higher premiums or refused cover.
  • To maximize revenue , insurance companies invest their underwriting profit in more conservative investments such as bonds and cash equivalents. Some also sell reinsurance to other insurance companies to protect them against insolvency. 

Key Highlights about the Insurance Company Revenue Model:

  • Revenue Generation : Insurance companies generate revenue by providing compensation to policyholders in the event of accidents, illnesses, deaths, or damages. They charge premiums in return for insurance coverage.
  • Premiums and Underwriting : Premiums are the regular fees charged to policyholders. Underwriting revenue is the profit earned by subtracting claim payouts from premium collections.
  • Risk Assessment : Insurance companies carefully assess the risk associated with each policyholder. Factors like age, medical history, claim history, and credit history are evaluated to determine the likelihood of future claims.
  • Risk Management : High-risk applicants might face higher premiums or be denied coverage altogether to manage potential future claims.
  • Investment Income : Insurance companies invest their profits in financial markets to maximize returns. Their significant capital allows for substantial investments in assets like corporate bonds, treasury bonds, and cash equivalents.
  • Reinsurance : Some insurance companies also engage in reinsurance, where they sell coverage to other insurers. Reinsurance protects insurers from excessive losses in situations where they face a surge of claims that could lead to financial trouble.
  • Example : For instance, if a car insurance company earned $15 million in premiums and paid out $9 million in claims, they would have $6 million in underwriting profit .
  • Investment Strategy : Due to not needing to manufacture physical products, insurance companies often have substantial funds available for investment in the financial markets.
  • Reinsurance Importance : Reinsurance helps insurance companies manage large-scale risks, such as those arising from catastrophic events like hurricanes, by spreading the risk across multiple entities.

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What is the Main Business Model of Insurance Companies?

June 9, 2023 | By Hitesh Bhasin | Filed Under: Business

The business model of Insurance Companies channelizes through revenue generation by putting money on risk. They bet on the risk that their policyholders will not die, or their vehicles will not entirely smash, or their property will not get scorched. All in all, Insurance Companies Business Model works around pooling risk from a payer and then redistributing that risk across a broader portfolio.

In this, the insurance company agrees to pay a specific amount of the money for the loss (mainly because of illness, damage, or death) of the assets faced by the insured individual.

In the process, they make money by charging premiums for offering insurance coverage and reinvesting those premium-amounts in many other assets that generate interest.

The process of making money varies from health insurance companies to property guarantors to property insurance companies. In this post, we will dive deep into the business model of insurance companies and try to understand how they channelize their business and make money. So, let us get started right away-

Table of Contents

Introduction to the Business Model of Insurance Companies

Insurance is not a novel concept. It has been in the commerce business for years and centuries. Insurance is a way to secure yourself or your belongings.

The company with which you have insurance takes up the responsibility of providing the compensatory amount in any damage or loss to the insured subject.

One has to deposit a specific amount in predefined intervals of time. It is called the premium. The company keeps this amount with itself, and if there is any loss of life or property, it compensates it using that money.

Major Types of Insurances offered by Insurance Company Business Model

Benefits to Insurance Companies

There are several objects and subjects which can be insured. The most important types of insurances are those who are very popular and subscribed to by many people. These are of those things which are widely used or are of the utmost importance.

1. Life Insurance

What could be more important than life? Nothing is more important in life than life itself. Hence, life insurance is the most popular type of insurance. People have responsibilities for their respective families and near and dear ones.

That is why they beneficially ensure their lives to those who are left behind after their demise. The premium for this is determined according to the health condition and medical history of the person.

2. Health Insurance

Many incidents are unforeseen and come as jolts in life. Such are the health catastrophes and medical emergencies.

If a person falls ill and needs a medical procedure to be done, he/she can claim this insurance and get that reimbursed.

The bills of the procedures are paid by the insurance company using the customer’s money as the installments of the premium.

3. Auto insurance

Afterlife and illnesses, the object which is at high risk of damage is auto. One uses automobiles and vehicles almost every single day.

They get worn out easily. Hence, one needs to ensure the vehicle. It makes that if the car breaks down someday or faces an accident, the insurance company will pay for its repair.

The data like how often the vehicle will need servicing, what are the specifications of the car and what is its average performance need to be considered here before determining the premium.

How Do Insurance Companies Make Money?

Since running an insurance company is a business, everyone looks for profits. The business model for an insurance company is very different from that of other business models.

There are two basic ways of making money for insurance companies.

1. Underwriting income

This type of income is a difference in the amount of money collected as premiums from various customers and the amount of money paid to reimburse the claims. If the total amount of dividends is more than the claims reimbursed, the company has a profit.

It requires the mathematics of the business model to be accurate. If the financial adjustments are made correctly, the company will get profits; otherwise, it will have to bear losses. Here, the total amount of premiums collected is very crucial.

The premiums should be determined based on factors like the age of the person, medical history, and other physical measurements in life and health insurance and the performance and maintenance required.

The claims that are to be reimbursed depending on various factors which are known to the client.

2. Investment income

The insurance companies do not need hard cash to invest in building the company. They take money from their clients and then invest that money in other markets and businesses.

The profits gained from these investments form a source of income for the insurance companies. These companies prefer to invest in a low-risk sector where they will get certain benefits.

This means income is called investment income. It contributes mainly to the development and profitability of an insurance company.

3. Coverage lapses

If the client outlives the period for which he/she was insured or did not need to claim any reimbursement, it is called a coverage lapse. These coverage lapses work in favor of the insurer.

If the client goes on for some time without paying the premium, the policy gets inactive, and the insurer can benefit from it.

If the policy expires without any claims being made on it, the insurer gets financial profits. It is a huge source of income for insurance companies.

4. Cash value cancellations

If a client wants to take all the money back before the policy ends, this situation is beneficial to the insurers. In this case, the cash value cancellations take place.

The insurance company gives only that amount back, which is the interest they have earned on the investment made from the premium they have taken from the client.

The premiums that the client has paid stay with the insurer giving them scope for financial profits.

Benefits to Insurance Companies

Benefits to Insurance Companies

Insurance companies have a lot of benefits other than financial profits. These benefits work in favor of the company and help them achieve the desired targets .

1. Reduce risks by increasing automation

Automation has paved the way for great results by reducing human intervention and human errors in many processes.

Automation has conquered the arena of insurance companies as well. Robots and technology have replaced humans. The use of SaaS (Software as a Service) has helped this industry rise to great heights.

2. Easy access to user information

The information of users and clients can be used in many forms and for many purposes. This information can fuel other businesses where this information can prove to be helpful.

It proves to be beneficial for insurance companies who would want to venture out in other business avenues.

Final Thoughts !

The business models of insurance companies are unique to every company based on various factors that ensure they do not suffer losses and always enjoy humungous profits.

As per the industry data, only 3% of consumers who pay their insurance premiums every year make a claim. So, Insurance Companies Business Model is destined to make significant profits.

They take all the premium payments and invest them continuously to multiply their profit margins.

On the concluding note, it can be said the profit-favoring meter is always going to be tilted towards the insurance companies.

What kind of insurance policies do you have?

Did this post change your perceptions about your insurance policies after knowing the revenue generation potential of the business model of insurance companies?

Liked this post? Check out the complete series on Business Models

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About Hitesh Bhasin

Hitesh Bhasin is the CEO of Marketing91 and has over a decade of experience in the marketing field. He is an accomplished author of thousands of insightful articles, including in-depth analyses of brands and companies. Holding an MBA in Marketing, Hitesh manages several offline ventures, where he applies all the concepts of Marketing that he writes about.

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New Business Models in the Insurance Industry

Encora | November 16, 2021

The insurance industry is rapidly changing to accommodate the needs of today’s society. As a result, new business models are emerging to provide insurance in ways that better suit their customers. These new business models include using technology, digital distribution, and ecosystem-based models. Of particular note is how insurance companies partner with niche providers. They offer more than just plain old insurance services to keep up with the demand for fintech services in the market.

Systems based on ecosystems, such as those used in insurance, allow for interactions across the value chain. These systems utilize a specialized infrastructure to provide better service offerings, more personalized customer experiences, and increased levels of automation. While the advantages are typically obvious, insurers may need to establish a plan for developing the most effective ecosystem techniques and business models.

For more engaged clients, partner with insurtechs

Insurtechs can assist insurance carriers in various ways, including access to customer-centric technology and analytics and the ability to deliver rich and personalized client experiences. Typically, firms may profit from these partnerships by clearly defining vital strategic goals and adopting a test-and-learn mentality.

Insurtechs are crucial to the development of thriving ecosystems, allowing for significant innovation across the sector. Insurers have many possibilities to invest in or collaborate with insurtechs, including developing products faster, engaging consumers in new ways, or improving back-office procedures.

Insurtechs’ emphasis on innovation, agile working methods, and next-generation thinking has benefited insurers in various ways. The most promising opportunities for cooperation and new capabilities frequently involve the most sophisticated technologies, such as the Internet of Things, artificial intelligence (AI), machine learning, and robotics.

Innovative workforce and sourcing methods can be used to improve the operating platform’s effectiveness and agility

Ecosystems help various stakeholders to play to their strengths. For example, insurers may benefit by increasing their operating model and emphasizing core, unique capabilities while also taking advantage of appropriate sourcing methods for everything else.

A large US insurance company opined that a new spin-off firm could compete more effectively in the personal life and annuities industries. The organization was lean, cloud-based, and asset-light due to the limitations and intricacy of legacy technology architecture. As a result, the firm became poised for long-term development free from the clutches of any technical debt and the skill that appeals to digital-savvy customers.

Involving specialized resources also helps drive efficiencies. Offshoring and outsourcing, for example, may improve efficiency and cost savings across routine operations, allowing human and financial resources to focus on the most valuable activities. The first calls are usually transferred to nearshore or offshore captives, whereas policy administration and call center support are generally the first to be migrated. Third-party administrators (TPAs) are frequently a good choice, while other insurers have implemented SaaS solutions instead of expensive and risky system upgrades or replacements.

By digitizing existing business models and adopting cutting-edge technology, you can improve performance

Many insurers have been held back by costly, inflexible legacy technology and significant technological debt for years. However, insurance companies that modernize their basic systems stand to gain a lot from today’s cutting-edge technologies. Software-as-a-service (SaaS), artificial intelligence (AI), machine learning, and robotics enable better selling and customer service. For example, AI and robotics may help expedite payments in the claims process, starting with friction-less first notice of loss, resulting in higher client happiness.

Similarly, predictive analytics, another game-changer for insurance, may enable insurers to better use internal and external data to price risk. In addition, insurers may effectively collaborate with ecosystem partners and simplify the digitization of critical procedures by moving more processes and data to the cloud.

Environments are already propelling insurance innovation at an accelerated rate and scale, according to specific experts. Furthermore, such systems are assisting carriers in overcoming long-standing issues with outdated technology and poor client engagement.

Given how ecosystems might be a successful go-to-market approach across sectors, owing to their success in generating growth and innovation and creating relevant products and tailored experiences, it’s reasonable to expect that incumbent insurance providers will soon implement these models across insurance.

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The Business Model of Insurance Industry

The Business Model of Insurance Industry

The insurance industry business model can be further categorized into two types of main activities, service domain, and support domain. Service domain activities make up the company's value chain and the support domain provides the infrastructure and support to sustain the value chain. Support activities may include corporate services, finance, human resources, or information systems, and technology. 

Insurance Value Chain:

A value chain provides a functional model for an organization. It constitutes the service domain, technological domain, and the organizational domain and models the various functions an organization must perform to deliver. It is through the act of defining these domains that roles and responsibilities are defined, and organizational structure comes into view.  A value chain describes the company's product offering from start to finish. A value chain is a chain of activities that a firm operating in a specific industry performs in order to deliver something valuable (product or service). A business unit is an appropriate level for the construction of a value chain, not divisional or corporate level. Products pass through activities of a chain in order, and at each activity, the product gains some value. The chain of activities gives the product more added value than some of the independent activities.

The following seven primary activities depict the insurance sector's value chain as an end-to-end process:

Value Chain Step1: Marketing:

Marketing plays a vital role in the insurance industry. It is the first step in the value chain process for insurance providers. At this point, a business must determine which policies it will offer. It is used to increase sales and sustain marketplace positions for major companies and by smaller companies to build and grow their businesses. Regardless of size, marketing tactics and strategies are developed by all in the industry to target consumers and prospects to cover their insurance needs for home, health, life, and commercial coverage.

Value Chain Step2: Risk Modeling:

As part of marketing, a business must determine the policy mix and pricing strategy. To determine how premiums will be calculated for each policy, the business must also perform risk modeling. Risk management is very important for the insurance industry. Insurance means that insurance companies take over risks from customers. Insurers consider every available quantifiable factor to develop profiles of high and low insurance risk. The level of risk determines insurance premiums. Generally, insurance policies involving factors with greater risk of claims are charged at a higher rate. With much information at hand, insurers can evaluate the risk of insurance policies at much higher accuracy. To this end, insurers collect a vast amount of information about policyholders and insured objects. Statistical methods and tools based on data mining techniques can be used to analyze or to determine insurance policy risk levels.

Insurance products are priced, or rated, according to a complicated algorithm that matches risk characteristics to the possibility of a claim. Rate adequacy ultimately plays a vital role in achieving an underwriting profit. Using the information gathered from risk modeling, the business can then determine the actual prices for each policy.

Value Chain Step3: Sales:

Once the marketing and risk modeling is achieved, the insurance business player is now in a position to begin selling its insurance policies to customers. In the old days, most insurance buyers worked exclusively with insurance agents to determine and address their insurance needs. The agent was the primary source of information, education, and advice. However, today’s buyers are demanding more choices and insurance companies are trying out more varied sales strategies to reach a much broader base of potential clients. Insurance carriers are experimenting with orchestrating a mix of diverse distribution channels - including the internet, call centers, social media, and/or agents – to meet the changing needs of the market. Selling involves quotations, proposals, risk assessments, and commission calculations. Commissions are paid to all parties involved in the distribution channel.

Value Chain Step4: Policy Administration:

Having sold a policy, the next step is to write the policy. Most life insurance providers use policy administration systems to handle their applications, policy changes, anniversary processing, and other business-critical functions. This step involves keeping full records and providing support for all policy lifecycle transactions - from policy issues, billing, collections, and policy processing to claims.

A typical insurance company produces millions of printed insurance policies each year. These policies are created with the help of technology, with clerks and support staff responsible for the accuracy and timely delivery of the documents. An army of staff oversee the assembly, printing, and mailing of each policy, as well as the filing or archiving of all documents for future reference.

Value Chain Step5: Billing:

Every issued policy and insurance company sells is a financial transaction that must be booked, tracked, and supported. Billing departments produce invoices, accept payments, and coordinate monthly payment plans for each policy. The billing department is also responsible for providing customer support on all issues related to billing. Customers can be billed once their policies have been written.

Value Chain Step6: Claims:

Customers who have paid their premiums may at some point make a claim. Efficient claims management is vital to the success of both large and small companies working within the insurance industry. Major components of the claims handling process include developing strategies to cut costs and reduce fraud while keeping customers satisfied. The company claim department and/or the intermediary (if applicable) need to be made accessible for the claimant. If an intermediary is an initial contact for claimants, claims should be sent to the company claim department within an appropriate time period. The insurance company contacts the policyholder or sends an acknowledgment of receipt as soon as the claim is received. This activity is optional, however, as customers may never make a claim. Once a claim has been filed and, when applicable, after any additional documents that are required to process the claim have been received, claimants should be informed of the acceptance or denial of the claim within a reasonable amount of time after the receipt of the notification.

The insurance company contacts any other company that is involved in the claim within a reasonable amount of time and resolves inter-company claim disputes as quickly as possible. The insurance company endeavors to settle the claim as soon as possible and advises in writing the policyholder on the reasons for any delay. Quick claims settlement as well as high-quality and punctual information provided to the policyholder are key competition features for insurance companies. After an agreement has been reached between the company and the policyholder on the amount of compensation, the payment is effected within a reasonable amount of time.

Value Chain Step7: Customer Service:

Customer service activity involves serving the needs of customers until their policies expire. Customer service is clearly very important for winning new customers and retaining existing ones. Customer service traditionally has fallen into one of three major categories; advisory services, informational services, or transactional services. Each category focuses on achieving specific goals or outcomes and generally is associated with a service channel through which services are delivered. Advisory services are the most interactive category and generally focus on longer-term relationships, ensuring that customer needs are satisfied with appropriate insurance products or services. Such services are a critical component of long term value since customer insurance needs change over time.

Information services provide accurate and timely information in response to customer inquiries.  Examples include requests for payment address or status, claims or contract status, and financial and rating information. Transactional services are specific requests that initiate or trigger actions or changes and tend to take the form of material changes to a policy, administrative changes, or fulfillment.  Examples include the first notice of loss, the addition of a vehicle or coverage to an existing policy, coverage changes, address changes, and requests for ID cards and forms.

How money is made in Insurance Business:

The major income sources for Insurance companies are Earned Premium and Investment Income. The expenses are Incurred Loss/Claims and Underwriting and Other Expenses. Earned premium, a source of income, is the total of all the premium payments received by an insurer for the current coverage period. Premiums are not considered "earned" until the policy period they cover is over. Investment income is the residual income generated as a result of investing premiums in the capital markets. Investment income also includes annuity considerations and asset earnings.

Incurred loss is the sum of all claims paid, adjusted by the change in claims reserve and related claim expenses for the same accounting period. Underwriting expenses include all the costs associated with a policy, including commissions and the portion of administrative, general, and other expenses attributable to underwriting. Clubbed with other expenses the profit for the Insurance company is calculated by subtracting from the total revenue.

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The Business Model of Insurance Industry

What is Reinsurance Industry?

A primary insurer purchases reinsurance to limit its exposure, usually to one specific type of risk, thereby diversifying its book of risk. Businesses in this industry focus on assuming all or part of the risk associated with existing insurance policies originally underwritten by direct insurance carriers. In other words, the primary activity of this industry is insuring insurance companies. Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers.

What is Finance? Meaning, Definition & Features of Finance

What is Finance? Meaning, Definition & Features of Finance

Finance is the science around the management of money. Finance encompasses banking, credit, investments, assets, and liabilities. The finance function encompasses a variety of functions, activities, and processes. Finance also consists of financial systems. Acquisition, allocation, utilization, and channelizing the funds to maximize the shareholder's wealth. Finance includes public, personal, and corporate finance.

Sectors of Insurance Industry

Sectors of Insurance Industry

The insurance industry classifies the different products it offers by sector. The insurance sector is made up of companies that offer risk management in the form of insurance contracts. There are four main insurance sectors: Life & Health Insurance Industry, General Insurance Industry, Specialty Insurance Industry & Reinsurance Industry. This article describes the current insurance industry sectors and their associated activities, products, and services.

Principles of Insurance

Principles of Insurance

This article helps the student to understand the legal principles and provisions of the insurance law. Starting with the fundamentals from which law is derived, this article helps the student to understand the salient aspects of any insurance contract, the rights and obligations of parties to the contract, and the legal environment within which insurance practice is carried out. Explore the seven most important principles of insurance.

Overview of Insurance Sector

Overview of Insurance Sector

The insurance industry comprises companies and people who develop insurance policies and sell, administrate, and regulate them. Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. The insurance Industry manages the risk to people and businesses from the dangers of their current circumstances. Insurance policies are a safeguard against the uncertainties of life.

Types of Insurance

Types of Insurance

Insurance is categorized based on risk, type, and hazards. Logically, any risk that can be quantified can potentially be insured. Understand the importance of insurance and the different types of insurances like Life Insurance or Personal Insurance, Property Insurance, Marine Insurance, Fire Insurance, Liability Insurance, Guarantee Insurance.

Importance of Insurance

Importance of Insurance

Insurance policies are a safeguard against the uncertainties of life. Insurance policy helps in not only mitigating risks but also provides a financial cushion against adverse financial burdens suffered. From a macro perspective Insurance industry turns capital accumulates as premiums into productive investments thereby promoting trade and commerce activities which result in the sustainable economic growth of the economy.

BFSI Industry Overview

BFSI Industry Overview

BFSI is an acronym for Banking, Financial Services, and Insurance and popular as an industry term for companies that provide a range of such products/services and is commonly used by IT/ITES/BPO companies and technical/professional services firms that manage data processing, application testing, and software development activities in this domain.  Banking may include core banking, retail, private, corporate, investment, cards, and the like. Financial Services may include stock-broking, payment gateways, mutual funds, etc. The insurance covers both life and non-life.

What is Life & Health Insurance Industry?

What is Life & Health Insurance Industry?

Insurers in this industry directly underwrite insurance policies relating to life, health, accident, and medical risks. Life and annuity insurance covers not only life and annuities but also health and disability. Read more about the health and life insurance industry. Life and health insurers generate revenue not only through the specific activity of insurance underwriting but also by investing premiums.

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Revenue model of insurance companies.

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Prabudh Mishra

Created on 16 Nov 2021

Wraps up in 6 Min

Read by 11.2k people

Updated on 13 May 2023

main business model for insurance companies

Insurance company payouts... We’ve seen the dramatic presentation of these in various media where someone’s life is put in peril to release a massive payday in the form of insurance ke paise or we see the “besahara family” looking for respite in the form of insurance ke paise.

Well these portrayals are rather single-dimensional, as a lot of insurance payouts are a lot less dramatic and do not only cover the loss of value to an unfortunate passing of a person.

Another aspect that isn’t as glamorous(might explain why it’s not covered as fervently), but equally important if not more, is how insurance companies make the money to give out in these multiple cases while maintaining their businesses, preferably at a profit.

So today we turn the spotlight on this little-known facet of the insurance industry as we find out “How do insurance companies make money?”

The Insurance Industry

The insurance industry of India is regulated by the Insurance Regulatory Development Authority of India (IRDAI) which estimates that the market for insurance will increase exponentially over the next few years due to innovative products, well-organized growing distribution channels, and government policies like Pradhan Mantri Jeevan Jyoti Yojana, Atal Pension Plan, and Covid -19 insurance policy schemes.

The life insurance industry of India is dominated by LIC, with 66.2% of the ‘life insurance’ market in its hand.

The share of the private and public sector in the ‘non-life insurance’ segment is in a competitive stage where the private sector enjoys 48% of the market and the public sector has the next 38.8% of the market as per the data of FY20.

main business model for insurance companies

Source: Indian Brand Equity Foundation(IBEF)

Moreover, in February 2021, the finance ministry has injected Rs. 3000 crores into the insurance industry and has also increased limits for Foreign Direct Investment from 49% to a humongous 74%.

Thus, all in all, we can say that with every possible entity and policy supporting the insurance industry, it is bound to rise! And so we are here to simplify the working of the insurance industry for you. 

Interested? Hop in!

Meaning of Insurance

Starting with the basics first! 

Insurance is a legal contract between two parties which consists of the insurance company ( insurer ) and the individual ( insured ), in which the insurance company agrees to financially protect the insured individual for financial losses caused by a type of event which qualifies as the one to be insured in exchange for the premiums paid by an individual. 

To simplify, it is a risk transfer mechanism in which you transfer your risk to an insurance company in exchange for protection against financial loss caused by unforeseen events ranging from the ones in your life to the mobile phones you use and in order to avail such too-good-to-be true services, the premium is the amount you pay for this agreement. 

Finally, it's critical to safeguard what's 'vital' to you.

Let's look at the aspects which qualify as an insurable risk.

What qualifies as an insurable risk?


For an unforeseen event to be labeled as an insurable risk, it has to be the one that can possibly be stated in numbers. This is an essential prerequisite as an insurance company calculates the amount of premium required based on this parameter. 


‘Unforeseen’ is the word that you will come across every time you go through a write-up on insurance as it is one of the requirements for an insurable risk. Any measurable loss that occurs by chance is likely to be considered as an insurable risk. 


A measurable loss that occurs by chance now has to be reasonable in terms of money as well. The loss that occurred should not be too expensive to be covered. 

Next, let’s see exactly what can be insured as we look at the various types of insurance products

Types of insurance products

Insurance products can be generally classified as either Life insurance products or General Insurance products. What do they mean? Well, let’s have a brief look into them. 

Life insurance protects you from the likelihood of unforeseen financial loss from dying. Term plans, endowment plans, whole life insurance plans, money back plans, and unit-linked investment plans are just a few examples of life insurance policies. Many life insurance policies, which incorporate protection and savings, can be an excellent tool for long-term savings .

General insurance products, on the flip side, cover financial losses caused by a variety of risks other than those related to mortality. Health insurance, motor insurance, marine insurance, liability insurance, travel insurance, and commercial insurance are all examples of general insurance products that cover a wide range of risks.

Picking the Right Insurance for you  

There’s no right or wrong  answer to this choice because there is a further classification of them in the aforementioned categories. 

In addition to this, insurance products are highly dynamic in nature and one has to spend a lot of time analyzing whether or not the premiums are affordable and also whether the offerings and the specified terms and conditions of the insurance align with your needs or not.

There is a solution to ease this process and that’s our very own tech-driven financial planning platform, Finology Recipe . All you need to do on this platform is enter your age, your goals, the duration in which you want to achieve those goals, and your income. Following this, Finology’s Recipe will serve you with unbiased recommendations which can save and shape your future for the better! 

So, how do these companies make money? Let's find out.

Revenue sources of Insurance companies

TAKE MORE THAN YOU NEED TO GIVE OUT! This is how an insurance company does business. Let me elaborate and simplify this process for you. 

The business model of insurance companies has mainly 2 components; Underwriting and investment income. 

Underwriting activities

main business model for insurance companies

As seen in this figure, only a small part of the population that is insured ends up making a claim. These people are paid from the majority of revenue generated by premiums collected from insured individuals, what is left is used for running the business and the rest is profit.

For example, suppose there is an insurance company called XYZ and it has earned Rs. 5 lakh from the premiums paid to it. So, technically this becomes one of the revenue-making zones for the business. 

Now, since it is a business it might have incurred some cost for running it, as well as paid out a certain amount to its customers who have unfortunately suffered due to an unforeseen event.

Let’s assume that the expenses were equal to Rs. 1 lakh and Rs. 2 lakhs were paid out to the ones who have been insured by the company. 

Therefore, the total profit for XYZ insurance company is:

Revenue - (Operating expense + amount claimed by insured) which in our case is Rs. 2 lakhs. This is one way an insurance company makes money. 

Investment income

Now we all know that sitting on cash is the worst thing that one can do with their money as the time value or the purchasing power of it decreases with the time. The insurance industry understands it the best! 

Therefore they have constructed their business model around this concept as well. Now how does this work? See, an insurance company hardly keeps the premiums collected in their pockets. They rather invest this money in various financial markets in order to increase their income.

Now how can they do this? It’s simple, they don’t have to shell out much on creating a product unlike other industries like the automobile, FMCG or any other industry which is engaged in the creation of physical goods.

Therefore, just like any other investor, even the insurance company invests in markets and enjoys a return from it. 

Other revenue streams:

However, the revenue generation is not limited to only these two methods, there are several other like cash value cancellations wherein the insured individual chooses to close the account as a result of which the insurance company gets to keep all of the premiums that it has previously collected. 

Along with this they also make money from coverage lapses which are nothing but the penalty collected by an insurance company when an insured person defaults on payment of premium.

The Bottom Line

Premium is the major source of this industry’s income, that is its “revenue from operations”, and it invests a major part of this money as well since insurance companies don’t necessarily operate asset-heavy businesses to establish a production line for its inventory. Technical defaults and cancellations comprise the rest of the revenue source.

This is how the “Zindagi ke saath bhi, zindagi ke baad bhi” company and more like it stay zinda and functioning as well as generate enough money to be able to pay insured individuals their due amounts.

Following this information, has your outlook on the insurance industry changed? Let us know in the comments below if you learned something new, and share with a friend who you think wouldn't know these facts about insurance companies.

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Prabudh Mishra is a finance and behavioral economics enthusiast. He has a sense of purpose to eliminate irrationality in human behavior while they make the most crucial financial decisions in their life.

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Seven business models of the future for the insurance sector

EY Global Insurance Leader

Passionate transformation insurance leader. Inspiring the next generation of female leaders. Proud mother of three. Trail runner. Golfer. Skier. Loves traveling and cooking.

Ed Majkowski,

Peter manchester,, grant peters, show resources, nextwave insurance: large commercial and reinsurance (pdf), large commercial insurers and reinsurers must revamp their offerings to better meet the needs of their customers..

T he insurance industry continues to be an enabler of innovation. Since its creation three centuries ago, it has become an essential part of the global economy — providing security and resilience to businesses and individuals alike. But the fundamentals of how it operates have barely changed.

As we enter a new decade, the industry must reflect the reality of the needs of today’s businesses and society. Large commercial insurers and reinsurers in particular have an increasingly urgent imperative to realign their organizations and modify their offerings to include stronger preventive services against  new and evolving threats , including climate change and cyber risk.

But there is also a huge opportunity. Our latest  NextWave Insurance report (pdf) reveals that should the industry act now, an unprecedented growth and profitability spike is within reach. By 2030, we project that large commercial insurers and reinsurers could experience:

  • US$600b in revenue growth
  • 25%-35% improvements in combined operating ratios

To realize these gains, the industry must become more dynamic and agile.

A range of forces — from technology advancements to a dynamic value exchange — will propel the creation of new business models and the evolution of existing ones. 

We’ve identified seven business model trends already emerging across the industry that are pointing the way to what the future insurance ecosystem might look like:

1. Global composites

Market mainstays are evolving by leveraging strong balance sheets, strategic capital investments and new expertise to ignite growth across markets.

In the next decade, modernized technology will enable workers to re-skill while creating a new culture that places the customer, process efficiency and operational agility at the center of insurers’ business models.

On top of this, organizations will become much more data-driven and increasingly reliant on productive partnerships and collaborations. These capabilities will be necessary to offset competition from smaller players.

2. Specialty insurers

Boutiques are starting to protect their market share by writing risks others won’t.

In a highly specialized commercial reinsurance marketplace that generally demands either specialization or scale, the most successful boutiques may navigate competitive threats by targeting specific niches where they can operate profitably and few other firms are bold enough to tread. Their ability to survive will depend on the quality of their specialist expertise and a willingness to write risks others generally decline.

For these insurers, their strategic priorities for the next 10 years should revolve around expanding and enhancing business origination, loss prevention and other high-value services. They must become smarter and leaner in risk transfers and forge better relationships with partners and suppliers.

Today’s lean and tech-fueled organizations place more value on preventing losses than on transferring risks; they have different needs and expectations of insurance.

3. Global reinsurers

Innovative traditionalists are remixing their talent base and upgrading their technology to provide compelling risk-transfer solutions and access to secondary markets.

Future global reinsurers will devise innovative risk-transfer solutions with smaller teams. By creating partnerships with alternative capital providers, these reinsurers will increase product innovation and boost their market penetration rate. Additionally, they will diversify their offerings to include primary insurance products and new loss-prevention and ancillary services.

Advances in data mean they will employ more data scientists and fewer claims processors. Their ability to match different opportunities and new products for different risk appetites will help them provide access to secondary markets and engage with more stakeholders. 

To fully succeed, their strategies must prioritize growth opportunities and capital risk management capabilities. They must partner with alternative capital providers on product innovation, increase their access to big data and augment their analytical capabilities.

4. Underwriting agents

Future managing general agents (MGAs) are building momentum and capitalizing on market trends to create and capture profitable niches. 

Lean, agile and dynamic, tomorrow’s MGAs will build thriving niche businesses and grow profits faster and at a larger scale than the industry as a whole. Their sole purpose will be providing specialized underwriting services to portfolios and networks of investors and capital providers. Though specialization is key to success, “Mega MGAs” will emerge, reaching US$1b in revenue through consolidation or by duplicating their success across multiple market segments.

By leveraging defined products and targeted expertise to exploit distinct and profitable market niches, this subsegment may grow to US$150b in revenue, doubling the current revenue base. The largest may ultimately pivot to become insurers — a further threat to traditional business models.

They must engage with the most suitable partners, such as capital providers and supporting vendors. They must also strike the right balance between growth and scale as they seek to duplicate success across multiple segments.

5. Capital providers

Lean and agile portfolio managers are driving capital returns by aggregating strong delegated authority and managing general agents/managing general underwriters (MGAs/MGUs) to find profitable niches.

By 2030, some carriers will shift their focus to become experts in capital deployment and management of third parties. These firms will operate with relatively few employees and exceptionally lean in-house models. They will hone in on well-defined market niches, customer segments and specific product types. These portfolio managers will excel in managing arrangements with multiple delegated authorities (DA) for underwriting, claims handling and other service providers, such as loss prevention specialists.

Their strategic priorities will comprise identifying and engaging the top performing DAs and improve their operations by strategic sourcing. Should they deploy capital flexibly and efficiently, they will have a greater opportunity to develop niche products for target customer segments. 

How EY can help

Digital transformation services.

We help companies thrive in the transformative age by refreshing themselves constantly, experimenting with new ideas and scaling successes.

The traditional practice of pushing products into the market and seeking the right price point will no longer be sufficient to serve tomorrow’s platform-driven companies.

6. Self-insurers

Customers are beginning to compete with traditional insurers as “super-sized captives” and are developing in-house capabilities to self-insure more of their own risks.

Companies that formerly bought insurance are now more interested in selling risk, pushing traditional insurers into new roles and marginalizing some carriers. The absence of appropriate coverage for intangible and virtual assets will push large multinationals to deepen their commitment to self-insurance. They may also contribute to the rise of industry associations as they build out capabilities that can be sold on the open market.  

These companies need to get comfortable taking on more risk, as they learn to generate superior insights and develop tools for stronger loss prevention. Deep and granular analysis of their considerable data resources, as well as knowledge of their own operations, will match coverage to risk appetite and eliminate the need to place business on the open market. They will also develop the skills and knowledge to navigate increasingly complex regulatory and tax environments. 

Their main strategic priorities will need to include risk prevention, rather than risk protection only. They will need to consider product innovation to map coverage to existing needs, as well as develop new skill sets.

7. Global intermediaries

Brokers are repositioning as underwriting and risk advisors, boosting revenue and strengthening customer relationships. 

Risk placement will always be important to commercial insurance brokers, but in the future, it will no longer be their sole focus. Their placement teams will be considerably smaller after extensive re-skilling and the most successful firms will transform their models to expand and diversify their offerings to include underwriting and risk advisory services.

Of course, it will take considerable effort and significant investment to execute this transition. Brokers must overcome market skepticism about their ability to add value in a primarily digital world. They will also need new skill sets, higher-quality data and modernized technology. Those that transform successfully (and immediately) will be well positioned to lead the creation of industry ecosystems that connect industry players following variants of all these business models — a traditional strength of brokers. 

Their strategic priorities will consist of bringing in new skill sets to help develop new offerings. They will need to effectively utilize distribution networks to launch and refine services, along with use data comprehensively to identify opportunities to serve a broader range of customer needs.

The firms that transform most successfully will be those that drive near-term change urgently while simultaneously placing intelligent, long-term bets for the future.

An ever-evolving insurance ecosystem

Some of these changes are already underway, with organizations consciously pursuing business transformations that will enable successful future operations. Yet others are currently only in the early stages. Some will be easier to turn from vision to reality, while many will involve significant disruption to current ways of working.

As our previous NextWave personal lines and small commercial report (pdf) found, a business-as-usual operating approach is no longer an option. Changes are already impacting the industry now, and the early movers are seeking out competitive advantages that may become lasting as the insurance ecosystem is reshaped over the coming years.

We know what’s likely to come next — and picking the right business model to pursue will be key for insurers and reinsurers to effectively reposition for what’s to come.

Download: NextWave Insurance large commercial and reinsurance

This is a time of both turbulence and opportunity for the large commercial insurance and reinsurance sector. Developing a new model of innovation and sustained growth requires insurance leaders to think originally about how to re-invent the status quo – but some effective new business models are already becoming clear. 

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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