# How Insurance Companies Make Money A miniature insurance town shows how premiums, claims, costs, investing and reinsurance turn into an insurer's profit By Ivan Ćurak Topic: Society & Business [Open the interactive Jig](https://ask.jig.com/j/MNc2BFxo2gB3) ## Guide ### 1. Many pay a little Insurance is a promise\. You pay a small regular amount, called a premium, and the insurer helps if something goes wrong\. Every home in this town pays into one shared pot\. That shared pot is called a risk pool\. ### 2. A few need a lot Each year only a few homes have a bad day, like a storm\-damaged roof\. They make a claim, a request for help, and it is paid from the pot everyone filled\. Nobody knows which homes it will be, but across many homes the total is fairly predictable\. Statisticians call this the law of large numbers\. Press the button to play another year\. ### 3. Pricing the promise Experts called actuaries work out each price: the claims they expect, plus running costs, plus a small margin\. The two homes beside the stream pay more, because flooding makes a claim more likely there\. Underwriters decide which homes to accept and at what price\. ### 4. Where $100 goes Follow $100 of premiums through an example year\. About $70 goes back out as claims and about $25 pays for staff, selling and taxes\. Only about $5 is left over\. Claims plus costs, divided by premiums, is the combined ratio: 95 here\. Under 100 means the insurance itself made a profit\. ### 5. Money that waits Premiums arrive first, but many claims are paid months or even years later\. Meanwhile the insurer invests this waiting money, called the float, mostly in safe bonds, and earns interest\. The float is not the insurer's to keep: it is held for future claims, and regulators require reserves\. ### 6. Insurance for insurers One huge storm can damage thousands of homes at once\. So insurers buy insurance of their own, called reinsurance\. They pay part of their premiums to a reinsurer, which helps pay when disaster strikes\. Even when it is reinsured, the insurer still owes its customers every claim\. ### 7. Two ways to make money Profit comes from two places\. Underwriting is premiums minus claims and costs\. Investment income is what the float earns\. In a stormy year underwriting can lose money while investing still helps\. Example numbers for every $100 of premiums: underwriting, investing, total\. ### 8. Paying claims is the product Insurers do not succeed by refusing claims: paying them is what customers buy\. They earn by pricing carefully, sharing risk and investing wisely\. In 2025, US home, car and business insurers spent about $92 on claims and costs for every $100 of premiums\. Combined ratio 92\.2 in 2025 \(AM Best\), helped by few big disasters\. Calm years and stormy years make prices rise and fall in a cycle\.