Insurance Premiums
The fee an insurer receives from a policyholder is called the insurance ‘premium’. This premium, and the terms and conditions of the policy, are based on the likelihood of the risk happening and its value.
The insurer collects premiums on a number of policies and pools these funds, which it then invests to increase the amount of money held. Should any insured person or business make a claim on a policy, the insurer will pay out on that claim from the pool of funds.
The insurer is in business to make a profit and will be hoping that the total premiums it receives in any one year, together with any money it can make through investments, will exceed the total claims it has to pay out.
Insurers are very closely supervised to make sure that they always have enough money to pay all their claims.