Insurance companies shoulder plenty of risk for their clients. You will inherit this obligation when you successfully purchase an insurance company. This is the first thing you’ll learn when you tap an insurance agency consulting firm to advise you on the purchase.
With significant amounts of money at stake, it’s essential to learn how insurance companies earn money. There are two ways these insurers earn revenue – premiums and reinvestments.
Ways Insurance Agencies Generate Money
Premiums
Premiums are the periodic payments that your clients deposit to fund their insurance policies. Insurance providers calculate these settlements differently for each individual. Risk is central to these computations.
These firms employ teams of statisticians that calculate the odds of each client encountering situations that trigger the contract’s terms. They consider various factors, including pre-existing conditions, the client’s age, lifestyle, etc.
An insurance company will protect itself by imposing higher premiums on individuals considered at high risk. They will calculate premiums to exceed the total amount specified in the policy to reduce their exposure and earn profits.
Reinvestments
Inflation and other factors degrade monetary value over time. Thus, insurers must ensure that their clients’ money doesn’t stay dormant in their accounts. This means that they are responsible for investing the collective funds under their care, so their value grows short-term.
There are various short-term assets that insurance underwriters can reinvest their premium profits in.
Treasury Bonds
Treasury bonds offer interest earnings every six months for the next 20-30 years. They present an ideal long-term investment that pays out in short-term increments.
Corporate Bonds
Insurance companies can also purchase bonds from corporations bearing high credit ratings from Moody’s, Standard & Poor and Fitch. These bonds carry a considerable risk of default but return favorable interest earnings.
Cash Equivalents
These are instruments that represent liquidity sources. This category covers treasury bills, marketable securities, and commercial papers. Each of these has its own methods of realizing gains for its holders.
Evaluate a Potential Purchase with Insurance Agency Consulting
An insurance agency acquisition is a vital investment. You must employ experts at your side to advise you in every step of the process. Contact us today, and we’ll discuss your options and concerns.