The profit for any business is the total income of that business minus all expenditure and the same is true for US insurance companies.
Insurance companies in the United States are mainly private companies and that means they have a legal obligation to make a profit for their shareholders and to try and maximize that profit through reasonable action.
How does a US insurance company make a profit?
The primary source of income for most insurance companies is the premiums paid by their customers in exchange for their insurance policies.
In order for an insurance company to make profit, one of the most important obligations is for the insurer to manage their approach to insurance risks so that the money they earn through the payment of premiums exceeds not just the costs of any claims or benefits that they may pay out during the period but also so that the amount of premiums collected exceeds the total of this figure and the operating expenses of the business during this period.
Operating expenses are to pay for the things an insurance company has to do in order to offer coverage for the parties they insure. This includes things like rent of buildings, utility costs, the wage bill, IT infrastructure, etc. as well as paying their sales force commissions (an insurance company will normally use an insurance agent or insurance broker to sell policies to the general public or businesses and these people need paying too).
If my insurance company pays out more in benefits than it collects in premiums does that mean it won’t make a profit?
Not exactly, in some cases an insurance company will have additional investments available for generating revenue – for example, it may hold stocks and shares in other companies, or reserves of precious metals which have appreciated in value, or real estate holdings, etc.
In this instance it may be possible for an insurance company to compensate for losses incurred through paying out more in benefits than it collects in premiums, but this situation cannot continue forever and if it did the insurance company would gradually go insolvent which isn’t good news for policyholders because when an insurance company becomes insolvent it may not be able to pay out on any existing or future claims.
In general, it’s important for policyholders and shareholders for insurers to make money.