No one has given you a full answer but Mr. Enright is the closest thus far. People seem to be focused on premium vs. claims; but, this is most definitely NOT how insurance companies make money. Most insurers try to price their policies such that the total premiums collected each year are equal to the total amount of claims paid + expenses (we call this the combined ratio - claims+expenses:premium).
A combined ratio of 1 is seen as ideal because it means they are not over or under pricing their policies; meaning that they are underwriting the risks they want as valuation models square measure designed to draw in what a corporation identifies as their target market. With relevancy car insurance, most insurers actually run a loss on premiums, normally paying just over a dollar for every dollar of premium (combined ratio >1); whereas, they normally run slightly below a one quantitative relation on property insurance.
Ultimately, little or no, if any profit is made through underwriting (premiums) alone; rather, the reason for writing policies and collecting premiums is to build an investment pool.
When Associate in Nursing insurance underwriter collects premiums they place that cash into Associate in Nursing investment pool. They use the premiums collected to fund investments (generally in secure or low risk securities thanks to regulative restrictions). When a claim is formed cash is then taken from that pool and place into a brokerage account to pay the claim once the adjustment of it's completed.
Where insurers make their money is on the interest and return on investment earned from those premium dollars while they are in the investment pool. The ideal is to possess enough premium coming back in to stay the investment pool absolutely funded however the profit itself comes from the come back on investment instead of a surplus in the premiums charged vs. claims and expenses paid.
Let's look at State Farm Mutual for an example.... in 2011 State Farm collected $32,640,000,000 in premiums; they paid $22,794,000,000 in claims, $4,311,000,000 in claims expenses, $7,527,000,000 in administrative/service expenses; resulting in a LOSS of $1,993,000,000 on underwriting; however, they had investment income of $2.,901,000,000. So while they actually lost $1.9 Billion on premiums vs. claims and expenses (combined ratio of 1.06) they made $2.9 Billion on investement income. As you'll see, insurers do not build cash through premiums however through investment.
