>insurance companies make money on the difference between
rates and claims.
This isn't true, but is a common misconception.
Insurance companies make money by earning an investment income on the retained premium (the premium earnt between when a policy is paid for, and a claim is paid out). You can easily see this by reading analyst reports on publicly-listed insurance companies, which will analyse in detail the return on the retained premium.
An insurance company collecting more premium than claim costs is overpricing itself. An insurance company paying out more claims than premium is underpricing itself.
The idea is that the risk is managed through actuarial study, so the premium/claim payout is managed, giving an optimal time lag between collected premium and paid out claims.
The ability of insurance companies to create a very large pool of investment funds is why Warren Buffet buys them. He is an expert at investing, and the premium pool gives him the size he needs.
This isn't true, but is a common misconception.
Insurance companies make money by earning an investment income on the retained premium (the premium earnt between when a policy is paid for, and a claim is paid out). You can easily see this by reading analyst reports on publicly-listed insurance companies, which will analyse in detail the return on the retained premium.
An insurance company collecting more premium than claim costs is overpricing itself. An insurance company paying out more claims than premium is underpricing itself.
The idea is that the risk is managed through actuarial study, so the premium/claim payout is managed, giving an optimal time lag between collected premium and paid out claims.
The ability of insurance companies to create a very large pool of investment funds is why Warren Buffet buys them. He is an expert at investing, and the premium pool gives him the size he needs.