Skip to Content

Insurance 101: How Insurance Companies Make Money

Attorney Mark Rufo PC

You pay your auto insurance policy every month or on a regular basis to cover the premium, which is the cost of getting insurance. However, you will only get anything back unless you make a claim due to an auto accident or other damage to your vehicle. This may bring up questions about what a New Hampshire insurance company does with your money when you pay your premium and how it makes any money in the long run.

The Street notes that insurance companies are a unique business. They do not sell you a physical product. In fact, they do not really sell you anything up front. You pay for a guarantee that the company will help you if you get into an accident or you have some other valid claim.

Raising rates

An insurer has a simple business model of earning more than it pays out. If you make the insurer pay out a claim, the company recoups that by raising your rates. These increases often lead to the company making money.


When you initially pay your premium, the insurance company invests that money. However, as you probably know, investments are not guaranteed to pay off. If the insurance company makes a bad investment, it will simply raise premiums to make up the loss. Again, you are paying to make the insurer a profit.


The insurance company also makes sure that it chooses the right customers. That is why you have to provide a lot of information about yourself when signing up for insurance. The company uses underwriting to assess you as a risk. If you are a low risk, then the company will gladly do business with you, because it is not likely the insurer will have to pay out a claim. If you are high risk, a company may not insure you or will charge you high rates.

These tactics allow an insurance company to make money. If you never make an insurance claim, you are making the company a lot of money and are likely a valued customer. On the other hand, if you do make claims, the company may eventually try to get rid of you as a customer to avoid further losses.