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How can an insurance company make a profit by taking in premiums and making payouts?
The value of the premiums the company takes in is higher than the value of the payouts it makes.
The value of the premiums the company takes in is equal to the value of the payouts it makes.
The company only makes payouts from a pool of funds, not from individual premiums.
The company issues its policies to individuals who are unlikely to require payouts.
which option is most likely the right one
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GPT-5 mini
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Option 1.
An insurer sets premiums so the total premiums it collects (plus investment income) exceed the expected claims and operating costs. They also pool risk across many policyholders and invest reserves, but profit comes from charging more than the expected payouts and expenses.
An insurer sets premiums so the total premiums it collects (plus investment income) exceed the expected claims and operating costs. They also pool risk across many policyholders and invest reserves, but profit comes from charging more than the expected payouts and expenses.
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