Insurance Dictionary

Insurer

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Insurance Dictionary -> Insurer

In the Insurance industry, the insurer is the term given to the company or financial institution that sells insurance policies to customers (otherwise known as policy holders or the insured). There are many types of insurer. Some are solely insurance companies, some provide other financial services, or some might even be a regular bank.

Somebody wanting to take out insurance will approach an insurer or a middle man (broker) and discuss the available policies. The insurer will then asses the person’s risk of needing to cash out the policy, and calculate a premium amount, which is the regular payment the holder must pay in to the policy; the logic being that the higher premium will counteract the likelihood of the holder cashing out. Using life insurance as an example, if the person taking out the policy has a bad illness, the premium will be higher than somebody who is healthy, because they are more likely to pass away and cash out the policy.

Insurer’s make a profit from the premiums paid by their clients. Similar to a bank, the money that is held in the policy account is used by the insurance company to invest, gradually turning up a profit. A successful insurance company will be able to acquire enough investment returns to remain profitable even after a parentage of their client’s cash out. In a lot of cases policy holders never cash out their policy, meaning the money remains with the insurance company. This is a substantial amount that keeps the company solvent. A simple calculation used in the insurance industry to demonstrate their business model is:

Profit = Premiums + Investment Returns – Pay Outs – Other Business Expenses.

There are number of advanced calculations used by insurance companies to determine the likelihood of somebody cashing out, but there are always outside factors beyond the company’s comprehension.





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