What Happens To Your Insurance Premiums
People often wonder what exactly happens to the insurance premiums they pay, and while most have a general idea how it works, the specifics may elude them.
In insurance accounting, money is always moving. Insurance companies settle claims, and pay taxes and other business-related costs (such as salaries, equipment and rent) on a daily basis. Insurers set money aside so they can respond quickly to disasters. This is known as a legal reserve, which insurance companies are required by law to maintain. This guarantees that an insurer can pay a large number of claims within a short period of time.
Prudent Insurance Investments
Insurers are among the most careful investors in Canada. On average, approximately three-quarters of their investments are in government bonds. To ensure that insurers can pay claims, the federal government makes certain the industry’s investments are low risk. Insurers strive to maintain portfolios that allow for quick liquidation of investments to pay claims.
Why Do Insurance Companies Invest The Money?
Your insurance company holds your premium until it is needed to pay claims. By investing the money and making a return, the company can offset the cost of claims. This means it can charge you less than you would otherwise pay. In some lines of business, claims can arise years after the policy expires. This requires diligent financial management so such claims can be paid.
Source: Insurance Bureau of Canada