🔍
Insurance Explained - How Do Insurance Companies Make Money and How Do They Work - YouTube
Channel: The Infographics Show
[0]
This episode is brought to you by Skillshare.
[2]
Get 2 months of Skillshare free and learn
new skills by using the link in the description.
[7]
Well some of us may think that there’s nothing
more boring than attending an insurance conference
[11]
on a wet Tuesday night in Boston.
[13]
And we may well be right, but if we look back
to see how the industry began, it isn’t
[17]
as dull as it might first appear.
[19]
From swashbuckling pirates to a ferocious
fire that ravaged the world’s greatest city,
[24]
insurance has had a colorful past.
[26]
But how do those grey suits who sell insurance
really make money, and how do the inner workings
[30]
of one of the most complicated fiscal models
really work?
[33]
If these questions whet your curiosity, then
stay tuned to today’s episode of the The
[38]
Infographics Show – Why do insurance companies
make money and how do they work?
[41]
What is insurance?
[43]
Well, insurance is a financial vehicle that
helps spread risk.
[46]
By taking a risk from an individual, and spreading
that risk around a community, the individual
[50]
is able to go about their personal or business
life without crumbling from financial ruin.
[56]
In the simplest terms, let’s look at two
people.
[58]
One is named Bob and the other Jim.
[60]
Bob says to Jim, I’ll give you ten dollars,
but if I lose my cell phone, you’ll have
[65]
to buy me a new one.
[66]
If Jim agrees, then that’s insurance right
there.
[69]
Insurance companies make money because they
evaluate the risk and decide whether it is
[73]
worth the gamble.
[74]
Jim believes that Bob probably won’t lose
his phone and he’ll therefore be ten dollars
[79]
richer.
[80]
If Jim finds 100 more people who are willing
to give him 10 bucks each to cover their phones,
[84]
he has 1,000 dollars.
[86]
If one of those 100 people loses their phone
and Jim pays 100 dollars as compensation,
[92]
he still has 900 bucks.
[93]
This insurance idea has been floating around
since the ancient Chinese and the Babylonians
[98]
spread their shipping risks.
[100]
But it wasn’t until around the 17th century
in London that modern insurance really took
[104]
off.
[105]
Merchant marine men and traders often hung
out in coffee shops in the business district
[109]
of London, and while drinking copious amounts
of coffee, the idea of modern day insurance
[114]
was born.
[115]
Lloyds of London, the heart of worldwide insurance,
was developed inside one of these coffee houses
[120]
and here’s how it worked.
[121]
First, you have the client.
[123]
Say the client has a ship that he is nervous
about losing to pirates offshore, or perhaps
[127]
the vessel will be destroyed in bad weather.
[129]
The client approaches an insurance broker.
[132]
The broker looks at the ship, or pays someone
to look at the ship, and they decide how much
[136]
the total value of that ship is worth.
[138]
The broker then assesses the risk.
[141]
He asks the client where he is traveling to
and what cargo he will be carrying.
[145]
With all this information, he draws up an
insurance policy which he shows to the third
[149]
person in the chain - the underwriter.
[151]
For a cheaper premium, the underwriter may
exclude a few risks.
[155]
And for a few more bucks, he may include some
extra risks.
[158]
Now there are normally lots of underwriters
approached, but one will be the lead, and
[162]
the lead underwriter, like Jim, will normally
take the largest proportion of the risk and
[167]
sign his name first on the policy document.
[170]
He is known as the underwriter, as he writers
his name under the risk on the insurance policy.
[175]
The lead underwriter makes the major decisions
when it comes to accepting the policy, and
[179]
will be the main man to agree to any claims
on the policy.
[183]
Once the terms of the policy are agreed to,
it is made legal, and the client is happy
[187]
and the ship sets sail - but not before paying
the insurance premium to the broker, who will
[191]
take about 10%, and pass the rest on to the
underwriter.
[195]
But what should happen if pirates board the
ship, steal the cargo, and burn it at sea?
[199]
Well, the client (if he is still alive, if
not, a representative of the client) will
[204]
speak to the insurance broker and the broker
will visit with the lead underwriter and tell
[208]
him the bad news.
[209]
The rest of the underwriters (there may well
be as many as 20 on a big policy) are told
[213]
the news and then the broker must negotiate
the best claim settlement for the client or
[217]
his or her representatives.
[219]
The underwriters pay the money to the broker,
who passes it on to the client, without deducting
[224]
any cut.
[225]
The broker makes his money once the premium
is paid, and will help negotiate the best
[229]
claims for his clients through gentlemanly
honor and the prospect of future business.
[233]
Now it may not be all bad news for the Underwriter.
[236]
If he is wise and not greedy, he may have
reinsured the policy.
[240]
Reinsurance puts the underwriter in the position
of the client.
[243]
The underwriter sells the policy onto another
underwriter or firm of underwriters, while
[248]
retaining a share of the premium.
[250]
Confused yet?
[251]
Think back to Jim and his phone insurance.
[253]
If Jim resold his 10 dollar phone policy for
9 dollars, rather than the 10 he received,
[259]
then he gets to keep a dollar each for each
of his 100 clients, meaning he has 100 dollars
[264]
completely risk free.
[265]
Similarly, much of the modern day insurance
that flows through Lloyds of London is reinsured
[270]
out of the building to smaller insurance companies
all across the world.
[274]
So what starts as a simple agreement between
the client and the broker (or Jim and Bob)
[278]
is spread across a business community who
each stand to profit from the premium or take
[282]
a cut of any losses.
[284]
This is how insurance works – by the spreading
of risk over communities.
[288]
So that is how maritime insurance was born.
[290]
It was developed through the need of ship-owners
to carry on in business should they lose everything
[294]
whilst at sea.
[295]
But what about property insurance?
[297]
Well around the same time, 1666, the great
fire of London devastated the city where modern
[303]
day insurance was born, and famous architect
Sir Christopher Wren, in his great London
[307]
redevelopment project in 1667, made sure to
include an insurance office in his new plan.
[313]
Now property insurance is commonplace with
most homeowners having a policy in place.
[317]
Also medical, life, travel, car, and dental
insurance are all commonly held policies.
[323]
Even pet insurance is a major insurance business
nowadays.
[326]
Over time the business model has evolved.
[329]
Modern day insurance companies are fiercely
competitive, which is good for you, the client,
[333]
as polices are priced at their lowest possible
point.
[336]
Companies now look to write as many polices
as possible to create a financial pool.
[340]
They take the premium from thousands of policies,
and invest that money in another financial
[344]
product.
[345]
So the insurance underwriter may pay out more
claims than they make in policy premiums.
[350]
But they have invested all those premiums
in a high interest investment scheme, so they
[354]
make their money outside of the original insurance
product.
[357]
Insurance in this example is a way of creating
cash flow to be used in more lucrative investments.
[362]
And if you are wondering what other creative
and lucrative ways there are to make more
[366]
cash, take a Skillshare class called “How
to generate Passive Income.”
[370]
Skillshare is an online learning community
with over 20,000 classes in management, marketing,
[375]
UI/UX design, and more.
[377]
If you use our promo code infographics9, you
will get Premium Membership for 2 months completely
[382]
free!
[383]
Premium Membership gives you unlimited access
to all of the classes available on Skillshare!
[387]
Join the millions of other people who are
already members, and support The Infographic
[390]
Show at the same time, by going to Skillshare.com/
infographics9 or clicking the link in the
[396]
description, and start learning today!
[398]
So, what do you think?
[399]
Do you have insurance to protect against the
unexpected?
[401]
Do insurance companies charge too much?
[404]
Is it all just a scam?
[405]
Let us know your thoughts in the comments!
[407]
Also, be sure to check out our other video
called US Teachers vs UK Teachers!
[411]
Thanks for watching, and, as always, don’t
forget to like, share, and subscribe.
[415]
See you next time!
Most Recent Videos:
You can go back to the homepage right here: Homepage