Where does your insurance money go?

The math supporting this calculator operates using the sum of two primary components that influence how insurers make money: Underwriting Income and Investment Income.

• Underwriting Income: Premiums paid to a carrier go towards both expenses (underwriting & operating) and paying out losses. If premium paid is $1mm, expenses are $350,000, and losses $500,000, the insurer has an underwriting income of $150,000.
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• Investment Income: For many types of risks, losses aren’t paid out all at once. There are some types of risks that can take 7-10+ years to pay out. As claims arise, insurers set aside money to pay for those claims (Case Reserves) in addition to other claims they assume will come up (IBNR). These are called reserves. Over time, these reserves are invested in a variety of asset classes to return investment profit to the insurer while they wait to pay claims. From our earlier example, if those $500,000 of losses takes 5 years to pay out, those funds are invested and accruing return over that 5 year time period.

Together, the Underwriting Income and Investment Income make up the Total Income an insurer makes on its policies. After 5 years of paying premium, you can expect your insurer to make, approximately, the amount displayed above the graph.

The following additional assumptions are used as part of the calculations:

• Investment Return Rate: 5%
• Annual Premium Increase: 10%
• Insurer Expense Ratio: 40% (insurer operating costs)
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Disclaimer: Results are intended for illustrative purposes only. The fundamental assumptions used in the calculation may differ significantly across industries, coverage types, captive structure, actual policyholder experience, and more.