How insurance companies make money is a $169 billion secret hiding in plain sight. Property and casualty insurers made a record $169 billion in profit in 2024, the same year your car insurance went up 15% and your homeowner’s premium jumped 20%.
we’re paying more. They’re making record profits. It feels like a scam, doesn’t it?
Well, Insurance companies aren’t getting rich by denying your claims. They’re getting rich from something most people don’t even know about.
This article breaks down exactly how insurance companies turn a profit.
How Do Insurance Companies Make Money? 2 Main Revenue Streams
First of all, I suggest you forget everything you think you know. Insurance companies have two main revenue streams.
Revenue Stream #1: Underwriting Profit
This is the one everyone knows. You pay premiums. The insurance company collects premiums from thousands of customers. When someone files a claim, they pay it out. If premiums collected exceed claims paid, that’s underwriting profit.
In this case most customers lose small amounts. A few hit jackpots. But the house always structures the game so that overall, they come out ahead.
But the twist is many insurance companies don’t make much money this way. Health insurance profit margins dropped to just 0.8% in 2024. In some quarters, they actually lose money on underwriting.
So the question is how are they profitable? That brings us to the second revenue stream.
Revenue Stream #2: Investment Income
Insurance companies don’t just sit on your premium payments. They invest premiums in bonds, blue-chip stocks, and real estate.
Let’s say, We pay our car insurance premium in January. We don’t get into an accident until November. That’s 10 months where the insurance company invests our money and earns returns on it.
If we multiply that by millions of customers, that’s a massive investment fund. Insurance companies are among the biggest investors in our economy.
Real example:
You pay $1,200 annually for car insurance ($100 monthly). The insurance company immediately invests that money at a 5% return. By the time they might have to pay a claim 6 months later, they’ve already earned investment returns on your money.
Oh, I want to mention a professional term. This is called “float” – the time gap between collecting premiums and paying claims. The longer the float, the more money they make from investments.
How Insurance Companies Make Money by Type: Life, Health, and Property
We know, for a fact, all insurance is not equally profitable. The business model changes dramatically. This is mainly Based on how long companies hold your money before paying claims. Let’s look at some common example:
Life Insurance:
Life insurance companies make the most from investments because they hold our money for decades. Most term life policies never pay out because people either outlive the term or cancel the policy.
Most people who buy life insurance buy term policies, which only last a set number of years. If you don’t die during that period, the insurance company keeps all your premiums. Pure profit. What a business.
And another scenario, for permanent life insurance, most companies invest the cash value portion aggressively. They guarantee us 2-3% returns but might earn 6-8% themselves.
Health Insurance:
As per my understanding, health insurance is the toughest business. The Affordable Care Act requires insurance companies to spend 80-85% of premiums on claims and only 20-15% on administrative costs.
In Q2 2024, the average health insurance profit margin was just 4.6%. Some companies like CVS Health (Aetna) have even reported losses.
Why so low? From my perspective, the reason is quite straightforward. people actually use health insurance constantly. Doctor visits, prescriptions, hospital stays – claims happen frequently. Less float means less investment income.
Property & Casualty:
This is where, in my view, the real money is made. Car insurance, homeowner’s insurance, business insurance – these have higher profit margins because most people never file major claims.
That’s why, from what I’ve seen, companies like Progressive and AIG were able to achieve industry-leading profit margins of over 14% in 2024. Because most drivers never get into serious accidents, but everyone pays premiums monthly.
Reinsurance
One often overlooked fact about insurance companies is that they insure themselves as well. This is done through reinsurance.
Reinsurance is the process by which insurance companies transfer some of their risks to other companies. After a major disaster like a hurricane, your insurance company isn’t taking the full financial hit alone. They’ve spread that risk to reinsurers.
3 Hidden Ways Insurance Companies Make Money You Don’t Know About
Beyond premiums and investments, insurance companies have three lesser-known ways to make money:
1. Lapsed Policies
Sometimes people forget to pay their premium. The policy gets canceled, and that’s the end of it. The insurance company keeps all the money that was already paid, and since no claim was ever filed, it never has to pay anything back.
2. Fees and Riders
Extra features sound small, but they add up. Want to add roadside assistance to your auto policy? That’s an extra $5-10 monthly. These add-ons are almost pure profit because few people use them.
3. Data and Analytics
Insurance companies know everything about risk. They sell this data to other companies. They use this data to price policies more accurately than competitors.
Do Insurance Companies Make Too Much Money?
If insurance companies are making record profits, are they overcharging us?
My answer is, Yes and no.
Insurance works because most people never file major claims. A few people have catastrophic events like house fires, cancer diagnoses, fatal accidents. The premiums from the majority pay for the claims of the minority.
In a way, you’re betting against yourself. You pay premiums hoping you never need to file a claim. At the same time, the insurance company is betting that you won’t file a claim either.
That said, insurers don’t make things easy when claims do happen. They often look for technical details in the policy, offer lower settlements than expected, or delay payments in the hope that people give up. This is part of how they protect their profits, even when it feels frustrating for customers.
Why Your Premiums Keep Rising
The question is: If insurance companies are already profitable, why do premiums increase every year?
Well, in my opinion, Four reasons:
- Inflation: Everything costs more. Car repairs, medical procedures, home rebuilding – it all goes up.
- More claims: Natural disasters are happening more often, and medical expenses keep climbing. When claims increase, insurance companies pass some of that cost on to everyone.
- Low Investment returns: You already know, Insurance companies rely on investments to boost profits. When markets perform poorly, they earn less from their investments. So they often raise premiums to make up the difference.
- No Competitor: In many states, there’s limited competition. If every insurance company raises rates, you have no choice but to pay. This is really bad practice though.
Lets conclude:
Insurance companies make money in 2 ways: (i) collecting more in premiums than they pay in claims, and (ii) investing your money before they have to pay those claims.
So we can say, the business model isn’t a scam, but it’s designed to favor the house.
Thank You For Being With Me.
Mehrab Musa From Asset Stories.
