HOW INSURANCE COMPANIES MAKE MONEY

If my mind serves me right, this is the psychology played in the build up of insurance companies. There is always a big surprise as to how it happens that most of insurance companies are so rich yet they would be expected to be less richer after providing their services.

I have drawn the above flow chart to try and support my argument. Please do not get me wrong, I am just explaining what came to my mind after a small research, using two companies in my area, names withheld.

The company affiliates clients in three ways, directly through the company, via brokers and via agents. There is a lot of money accumulated trough these tributaries. The money goes into the insurance company, which in turn invests the money.

One company may use multiple brokers, to affiliate clients and collect money.

The company then makes relatively a smaller percentage of collections to the broker, and to the agents, who work directly for the company. The brokers then pay a pittance to their agents and encourage them to bring in more clients for them to increase their earnings. The broker, as a company on its own, invests it commissions to increase its financial status.

The insurance company then gives out the cover amounts to the clients who encounter the risks insured against. However, it is just a few of the clients that earn these reward. Many of the clients stop paying premiums for various reasons, and the money they have already ingested remains the profits of the company, while they gain nothing. Some clients are robbed off by the companies in that they get far below what they were promised, with their money subjected to tax and inflations. Some clients fail to submit appropriate documentation for a valid claim and their fund disappear in the thin air.

The insurance company contracts brokers in order to avoid paying rent for its own offices as it would cause the company to make many branches in order to reach more clients. The brokers hire their own staff and pay their salaries from the commissions and their investments. While the insurance company normally has one central office where it pays rent and staff.

The insurance company makes massive amounts of money from its investments and the shareholders go home with overflowing pockets. The insurance company does not need that much of startup capital as clients are the ones that accumulate the money into the company's system for the company to be able to provide its services.

Some of the agents quit but the clients they affiliated continue paying their premiums and no amount is deducted as commission for the agent. The brokers sometimes get liquidated or decide to cut ties with the insurance company, but the clients they brought in remain in the insurance company and all commissions remain now the property of the company.

Well, with this little said, you can see why the company share holders ride branded cars and own mansions while doing nothing to earn a living.

It is just a strategic and creative method of earning continuous income.