How do Insurance Companies work & earn their revenue?

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How do Insurance Companies work & earn their revenue?

Insurance Companies or Insurers in India are regulated as per the directives of the Insurance Regulatory and Development Authority of India, better known as the IRDAI. The IRDAI dictates the primary function of any Insurance Company operating in India to provide financial protection to the insurance policyholder against unforeseen events. The policyholders in such cases can be an individual, a business, or even an organization. The Authority issues IRDA License permits to Insurance Companies willing to provide risk covers to the policy consumers, thereby securing various aspects of their life.

What does an Insurance Company sell?

But IRDAI is not limited to the provision of an Insurer’s license only. The Authority also issues licenses for Insurance Web Aggregator, Insurance Broker, Surveyors and Loss Assessor, Insurance Marketing Firm, etc. But coming back to Insurance Companies in India, a typical Insurer offers a range of Insurance Products to its potential clientele, namely:

• Life Insurance
• Health Insurance
• Motor Insurance
• Travel Insurance
• Home Insurance, etc.

Such products cater to different types of risks for a consumer. They also provide financial protection to policyholders for loss or damage.

Premium Amount: Purchasing Policy from an Insurer

Insurance Premium is the Amount paid by the policyholder to its Insurer. The premium amount is determined based on the following factors:

• Type of Insurance policy sought
• Age of the policyholder
• Sum Assured 
• Risk involved

In return, the insurance company provides financial coverage to the policyholder per the terms and conditions mentioned in the policy document.

Claim Time for the Insurer

When the policy matures, or any damage occurs which is covered under the policy, then the policyholder can claim it with their Insurance Company. Thereafter, the Insurer investigates the made-claim and pays the applicable compensation as per the agreed-upon policy terms and conditions upon successful assessment.

How do Insurance Companies offer us coverage?

Insurance companies offer coverage by providing policies that carefully outline the T&Cs of the provided coverage. Such drafts need to be treated as contracts between the insurance policyholder as well as the insurance company. Every policy dispensation procedure can be roughly defined in the following procedure:

Insurance Application filing

The policy seeker applies for suitable insurance as per their need. They must provide the following information in the filed application:

• About Policy Seeker
• Their Assets
• Potential Risks involved that must be covered on policy subscription

Underwriting procedure for Application Assessment

The Insurance Company, upon application submission, evaluates and determines the level of risk involved in providing the stated coverage. Thereafter, the Insurance Company can approve or deny the application and consequently offer coverage as per the stated terms and conditions.

Payment of the Insurance Premium 

Upon policy clearance, the policyholder must pay the requisite premium. It is essentially the cost of the policy coverage. Considering all necessary variables, such as the involved risk and the sum assured, the premium amount is decided.

Coverage Period & Term of Maturity

The provided policy will outline the time period for which the coverage will be in effect. Upon the coverage period conclusion, the policyholder must timely apply for policy renewal.

Claim Time/Policy Maturity

If the policyholder experiences covered damage, then they can file for a claim settlement with the Insurance Company. The Insurance Company will investigate the made-claim. Upon successful assessment, the Insurer will provide compensation as per the made T&Cs.

How do Insurance Companies earn profits?

Insurers earning by Premium Collection

Insurance Companies primarily earn profits by collecting Insurance premiums from policyholders. Thereafter, they invest the collected amount in some of the following financial instruments:

• Stocks
• Bonds
• Securities

The collected premiums are based on actuarial calculations considering the level of risk involved in the particular coverage provision for a specific insurance policy. If the losses incurred by the Insurer are less than the collected premiums from the policyholder, then the Insurance Company earns a profit.

Insurers earning through Investments

Insurers also earn profits, in addition to collecting premiums, through their investment ventures. They invest in the collected premiums and earn returns on such investments. They can also earn profits by additionally charging amounts for the following services:

• Policy Processing
• Claims Processing
• Underwriting

As discussed, Insurers can earn profits through premium collections, investments in financial instruments, and charging service fees. But still, Insurance Companies can get exposed to various risks because of the aforementioned’s volatile nature, impacting their profits.

More on IRDAI firms

IRDA does not alone provide Insurer’s license in India. They can also provide licenses for IMFs, Surveyors, Web Aggregators, etc. Suppose you wish to be briefed about such services, like what certification is required for an Insurance Web Aggregator in India or How long it takes to obtain the Web Aggregator certification. In that case, you can consult with the IRDAI experts at Registrationwala. 

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