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Hi everybody,
Before going deeper into the topic on How These Insurance Companies Works and Earns Money? , Let’s find out What is exactly Insurance?
Insurance is a contract, In which Policy Holder receives financial protection against losses from an insurance company.
The insurance industry in India is accelerating at a remarkable pace. As of 2020 mobile internet penetration has already reached 700 million Indians and because of the Geo-wave, the internet has already reached the remotest parts of the country. These two factors are expected to catalyze the insurance penetration intensity in India. In fact, the IBEF report states that the Indian insurance industry will grow 4 folds in the next 10 years from its current size of 60 billion dollars and now with going IPO with public listed players like policy bazaar, LIC and SBI. There is one very very important factor that they need to capitalize on to become a dominating player in the insurance market. If they works well, the profits of this company can boost by thousands of crores in the next 10 years and obviously their stock price is going to shoot up accordingly. So, the question arises are:
- What is the next big revolution in the insurance sector?
- How will it increase the profits of the insurance companies by thousands of crores?
- What are the factors that you need to keep an eye to understand the insurance market better?
First of all, let’s try to understand , How do insurance companies make money!
Here’s a very simple explanation of this..
Let’s take the example of a company called Techytools insurance, that is selling car insurance to 1000 people. So each one of these 1000 people have bought a car that costs 10 lakh rupees. All of these customers are now going to pay a monthly premium to the Techytools Insurance company. Let’s say, this premium is 500 rupees. So each month, the Techytools Insurance company collects 5 lakh rupees per month and 60 lakh rupees in the entire year. Now if 20 people among these 1000 people meet with an accident, on average they claim an insurance of 20000 rupees each. Then the insurance company pays these people four lakh rupees in total to fix their damages. This way if I am the consumer and only paid 6000 rupees in premium I am still able to fix my repair that is worth 20000 rupees and at the same time the insurance company has collected 60 lakh rupees for the entire year. But they had to spend only 4 lakh rupees in recovering the repairs of its customers. At the end of the year, the Techytools Insurance company has 56 lakh rupees to pay its employees and generate a profit. This is how an insurance company works!
Now, if you look closely the reason Why the insurance company is able to make profit? is because out of that 1000 people only 20 people met with an accident. But if the same number rises up to 200 with an average claim of 20000 rupees, then it will cost the company 40 lakh rupees which leaves them with only 20 lakhs to pay the employees and generate a profit. Therefore the insurance company tries to minimize the number of claims so that it can generate maximum profits. Now the question over here is
- How does the insurance company do it?
Well this is where the terms and conditions come in. The Insurance company will put a condition like
- If the person driving the car does not have a license, then your claim will be rejected.
- If the vehicle gets damaged because you ignore the traffic rules, then your claim will be rejected.
This is the reason Why they appoint an officer called the ‘surveyor’ who comes to inspect whether your claim is real or it’s fake.
This post is going too long because there is too much thighs, that I want to discuss. That’s why I have created Second Part of this Series. A Big Thanks to all the reader’s if you’re reading till Now. Try to share this Useful Information with others, letting them understood How these Insurance Companies earn Money? Again Thanks for reading this.
