Everybody knows Florida insurance companies make money. Exactly how they do so is not always clear.

To understand how insurance companies turn a profit, and why they sometimes deny legitimate claims, it is important to look at how these organizations work. After reading, understand why it is in your best interests for your insurance company to be at least somewhat profitable, albeit perhaps not to the extent many large companies are.

Risk distribution

Insurance companies use premium income for various things that would be familiar to any small business owner:

  • Paying employees
  • Covering overhead
  • Expanding operations

However, the core of the business is investing money in a safe way. The idea is that money is available for policyholders, under certain conditions. This is how insurance companies can pay out when a disaster happens

Instant coverage

So, why do people consider it a bad idea to simply save up money and withdraw it for a disaster? In the case of a home policy, a good insurance company's premiums may be equal to about 1 percent of the value of the home per year. 

Saving at this rate, it could conceivably take an individual homeowner the entire length of a mortgage to cover cataclysmic roof disasters that cost 25 percent of the home's value. Some home and business insurance policies may have waiting periods before coverage begins, but these periods are usually much shorter than the length of time it would take to save up money.

There are still some questions associated with the insurance business. Why do these companies tighten coverage and reject claims when insurance executives can make around $11 million a year? How have these services become a legal or de-facto necessity of doing business or owning property? It is safe to assume at least one thing from looking at the general business model: Insurers often have the resources to immediately pay the claims they deny or delay.

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