Auto and Car Insurance

can anyone tell me the basic facts on how insurance companies work?

Public Comments

1. They take your money and pay you when you have a loss. they take from many and give to a few and keep the leftovers.
2. lots of people pool in their money. and when something happens the pool of money is reduced to pay the insurance claimer.
3. Insurance company is selling risk... Risk is the amount an Insurance Company will assume on itself vs the amount of risk that you want the company to assume in the form of a premium payment. The people that assume a risk to an insurance company, the insured, pays the insurance money, or a premium to the company. The company takes that money and invest it other money making areas, thus making more money for the insurance company. Insurance company's need to remain solvent, in other words it must have the ability pay out all claims in the event of a catastrophic event. A certain amount of monies the insurance company gathers must be in the form of liquid capital, the rest can be in the form of investments. Reinsurance is also purchased by insurance companies to protect them from loss, (who insures the insures)   Thats about as basic as it can get without going into greater detail.
4. Let's do this in story form You have a big Locomotive ( Steam Engine) behind the engine is many many cars. ( like coal cars) When the steam engine makes a stop the engine is filled with coal (MONEY)ie: premium from customers). so it can keep chugging along. Each one of the boxcars are also filled . Occassionally, the train stops to unload some of it's coal cars. (claims). When the train stops again it is replenished with coal again. (Insurance customers) The longer the train...the more coal it can handle (surplus) and thusly the more coal cars it can pull (reserves) and also... the the more cars it can dump. (claims )it can release. The Track this train runs on is highly regulated by the State. Meaning that it can only dump so many coal cars before it needs to stop and replenish itself with coal(surplus) also... The track tells it where to stop and go! Sometimes the train needs water to build pressure so it can dump many coal cars at once (reinsurance) however the engine has to pay for the water when it stops....and gives the water man some of it's coal. The locomotive can go on and on and on until for some reason it can't stop to pick up coal.....and runs out of track.. You then have an insolvent Locomotive
5. Just like any other company works. They have a product, they sell it, they have overhead, they pay it. Think of insurance companies as bookies. They set the odds.
6. In the simplest terms, you pay them a um of money , (that is definate, you must pay a premium) and if something happens ,which is covered by the policy, they pay you.( maybe it will happen. maybe not) Nothing happens. You lose Something happens, they lose. The amount of the premium is fixed, you know ahead of time wha tit will be. If somthing happens, you have no idea of how much it will be. (unknown)
7. Insurance companies provide protection against risk. Auto insurance: the cost of fixing or replacing your auto after an unexpected accident. Health insurance against the cost of unexpected illness or accident, Life insurance against the cost to your dependents of loss of income due to death, etc. Risk must be unexpected which is why people typically cannot get health or life policies if they are already sick and you cannot buy a homeowners policy if a hurricane is on it's way. The risk is determined by actuarial science across a large group called a "pool". For example, in auto insurance everyone who owns the same type of car is pooled together and the risk determined based upon fixing or replacing that type of car. The premium is determined by which type of risk pool you are in (for Life insurance: your age and health). You pay your premium into the "pool" of funds and a certain percentage of the pool of funds is used to cover loss claimed by members of the pool. If claims for a given period are higher than expected, then premiums may increase for the entire pool for the next period - which is why premiums increase over time. Insurance is regulated by both federal and state law. Insurance companies must apply to each before raising premium within a pool of risk. State and federal agencies periodically audit insurance companies to ensure fair claim and premium practices. Independent agencies such as AM Best, Moodys, Standard and Poor's, etc also rate insurance agencies with an A, B, C, D type rating. If you are looking for a quality insurance company, you can check their rating - many companies share their rating readily on their own websites.