What is an Insurance Company?

Understand what an insurance company is and whether this is the best option for your insurance needs.

An insurance company act as the financial backing for a potential risk. The basic concept of this is that the insurance company charge a premium to each individual they insurer and honour to compensate for prearranged events that cause a financial loss to the consumer.

When it comes to car insurance, the insurance company asses the degree of risk by effectively collating relevant information either directly from the consumer or more commonly via an intermediary using a predetermined set of questions. The insurance company then calculates an annual premium based on the risk factors of the overall criteria presented to them. The higher the risk, the more the premium.

How do insurance companies make money?

The way that the insurance company makes money is based on two elements. The first being direct profit from the consumer. Insurance premiums are paid for on an annual basis, the money collected for these premiums is effectively “pooled” together year on year, any claims made by a policyholder are paid out of the collective premiums. And as the proportion of claimants compared to policy holders is low a profit is therefore generated.

The second is investment, insurance companies will utilise the premiums they have pooled and invest them to create a return. The funds used are known as a “float” which is basically the premiums paid by policy holders which are not used to pay out claims.

Off course insurance companies will need to sustain this float if they are to continue being profitable and remain able to invest hence if a policy holder makes a claim, their insurance premium is likely to increase next year. In fact if an insurance company experience a high level of claims then if you are insured with them whether you have made a claim or not you could expect a premium increase across the board. It all helps keep the float topped up.

If you would like to know more about Heritage Insurance Brokers or would like a car insurance quote simply call us on 0121 248 9229 or arrange a callback.

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