How Do Insurance Companies Make Money?

The insurance company revenue model revolves around a claimant receiving compensation in the event of an accident, illness, death, or damage to an asset resulting from theft or a natural disaster. In return for continual insurance cover, the company charges a regular fee – otherwise known as a premium. In essence, insurance companies make money by carefully considering the risk of each policy. They bet that the holder will continue to pay for insurance coverage and never be required to make a claim.

Revenue SourceDescriptionAdvantagesDrawbacks
PremiumsInsurance companies collect premiums from policyholders in exchange for coverage. Premiums are typically paid on a regular basis (e.g., monthly or annually).– Steady and predictable income stream. – Provides funds to cover claims and operating expenses.– Competitive market may limit premium growth. – Regulatory requirements can affect pricing.
Investment IncomeInsurance companies invest the premiums they collect in various financial instruments, such as bonds, stocks, and real estate. They earn income through interest, dividends, and capital gains on these investments.– Additional income source beyond premiums. – Investment returns can boost profitability.– Market volatility can lead to investment losses. – Risk management required to maintain a profitable portfolio.
Underwriting IncomeThis is the difference between the premiums collected and the claims paid out. Insurance companies aim to underwrite policies in a way that results in a positive underwriting profit.– Provides potential for profit even before investment income. – Effective risk assessment and pricing are rewarded.– Losses from underwriting can offset investment income. – Requires effective risk management and pricing models.
ReinsuranceInsurance companies transfer a portion of their risk to reinsurance companies in exchange for payment (reinsurance premiums). This reduces the financial impact of large or catastrophic claims.– Mitigates risk exposure for insurers. – Helps maintain financial stability in the face of major claims.– Adds cost to the insurance process. – Complexity in managing reinsurance contracts and relationships.
Fees and CommissionsInsurance companies may charge fees for policy administration, policy setup, and other services. They may also earn commissions for selling policies through agents and brokers.– Additional revenue streams beyond underwriting and investments. – Encourages distribution through agents and brokers.– Competitive pressure on fees and commissions. – Regulatory compliance for fee structures.
Ancillary ServicesSome insurance companies offer additional services, such as risk assessment, consulting, and loss prevention. They charge fees for these services, generating additional income.– Diversifies revenue sources. – Enhances customer value and loyalty. – Expertise in risk management can be monetized.– Requires expertise and resources to offer ancillary services. – Market demand may vary.

Insurance company revenue generation

Most insurance companies make money via underwriting, investment income, and reinsurance.


Underwriting revenue can simply be defined as the money that is left over after the company subtracts the cash paid out in insurance claims from the cash collected via premiums.

Consider the example of a fictitious car insurance company that earned $15 million from insurance premiums in one financial year while paying out $9 million in claims over the same period. This means the company earned a profit of $6 million on its underwriting revenue.

Insurance companies devote a lot of resources to ensuring they make a profit from underwriting revenue. Applicants are vetted on a range of criteria including gender, age, medical history, claim history, and credit history. Whatever the criteria evaluated, remember that the company assesses each applicant according to the risk of them making a future claim.

If the risk level determined by an algorithm is too high, the company may raise the price of the premium or avoid doing business with the applicant altogether.

Investment income

If we return the previous example of the car insurance company with $6 million in underwriting profit, one could make the argument that the cash would be underutilized sitting in the company’s bank account.

To maximize returns, insurance companies invest their profits in the financial markets. They tend to have more money to invest than companies in other industries since none has to be spent creating or manufacturing physical products. Common investments include corporate bonds, treasury bonds, and interest-bearing cash equivalents.


Some companies also sell reinsurance to other insurers. These insurers purchase reinsurance to protect themselves from excessive losses in situations where they are overly exposed to an event that could lead to insolvency.

For example, a company may run into financial difficulty if a severe hurricane causes widespread damage to infrastructure and a subsequent increase in claims over a short period of time. Indeed, reinsurance is a lucrative industry, with climate change and COVID-19 related drivers expected to grow the global reinsurance market to around $556 billion by 2025.

Key takeaways:

  • Insurance companies make money by analyzing the risk of an individual policy. Generally speaking, they bet that the policyholder will continue to pay for insurance coverage and never be required to make a claim.
  • Insurance companies make a profit by collecting more in insurance premiums than they pay out in insurance claims. Strict criteria are used to determine the risk of each applicant making a claim in the future, with high-risk applicants subject to higher premiums or refused cover.
  • To maximize revenue, insurance companies invest their underwriting profit in more conservative investments such as bonds and cash equivalents. Some also sell reinsurance to other insurance companies to protect them against insolvency. 

Key Highlights about the Insurance Company Revenue Model:

  • Revenue Generation: Insurance companies generate revenue by providing compensation to policyholders in the event of accidents, illnesses, deaths, or damages. They charge premiums in return for insurance coverage.
  • Premiums and Underwriting: Premiums are the regular fees charged to policyholders. Underwriting revenue is the profit earned by subtracting claim payouts from premium collections.
  • Risk Assessment: Insurance companies carefully assess the risk associated with each policyholder. Factors like age, medical history, claim history, and credit history are evaluated to determine the likelihood of future claims.
  • Risk Management: High-risk applicants might face higher premiums or be denied coverage altogether to manage potential future claims.
  • Investment Income: Insurance companies invest their profits in financial markets to maximize returns. Their significant capital allows for substantial investments in assets like corporate bonds, treasury bonds, and cash equivalents.
  • Reinsurance: Some insurance companies also engage in reinsurance, where they sell coverage to other insurers. Reinsurance protects insurers from excessive losses in situations where they face a surge of claims that could lead to financial trouble.
  • Example: For instance, if a car insurance company earned $15 million in premiums and paid out $9 million in claims, they would have $6 million in underwriting profit.
  • Investment Strategy: Due to not needing to manufacture physical products, insurance companies often have substantial funds available for investment in the financial markets.
  • Reinsurance Importance: Reinsurance helps insurance companies manage large-scale risks, such as those arising from catastrophic events like hurricanes, by spreading the risk across multiple entities.

List of FinTech Business Models


Acorns is a fintech platform providing services related to Robo-investing and micro-investing. The company makes money primarily through three subscription tiers: Lite – ($1/month), which gives users access to Acorns Invest, Personal ($3/month) that includes Invest plus the Later (retirement) and Spend (personal checking account) suite of products, Family ($5/month) with features from both the Lite and Personal plans with the addition of Early.


Started as a pay-later solution integrated to merchants’ checkouts, Affirm makes money from merchants’ fees as consumers pick up the pay-later solution. Affirm also makes money through interests earned from the consumer loans, when those are repurchased from the originating bank. In 2020 Affirm made 50% of its revenues from merchants’ fees, about 37% from interests, and the remaining from virtual cards and servicing fees.


Alipay is a Chinese mobile and online payment platform created in 2004 by entrepreneur Jack Ma as the payment arm of Taobao, a major Chinese eCommerce site. Alipay, therefore, is the B2C component of Alibaba Group. Alipay makes money via escrows transaction fees, a range of value-added ancillary services, and through its Credit Pay Instalment fees.


Betterment is an American financial advisory company founded in 2008 by MBA graduate Jon Stein and lawyer Eli Broverman. Betterment makes money via investment plans, financial advice packages, betterment for advisors, betterment for businesscash reserve, and checking accounts.


Venmo is a peer-to-peer payments app enabling users to share and make payments with friends for a variety of services. The service is free, but a 3% fee applies to credit cards. Venmo also launched a debit card in partnership with Mastercard. Venmo got acquired in 2012 by Braintree, and Braintree got acquired in 2013 by PayPal.


Chime is an American neobank (internet-only bank) company, providing fee-free financial services through its mobile banking app, thus providing personal finance services free of charge while making the majority of its money via interchange fees (paid by merchants when consumers use their debit cards) and ATM fees.


Coinbase is among the most popular platforms for trading and storing crypto-assets, whose mission is “to create an open financial system for the world” by enabling customers to trade cryptocurrencies. Its platform serves both as a search and discovery engine for crypto assets. The company makes money primarily through fees earned for the transactions processed through the platform, custodial services offered, interest, and subscriptions.


Compass is a licensed American real-estate broker incorporating online real estate technology as a marketing medium. The company makes money via sales commissions (collected whenever a sale is facilitated or tenants are found for a rental property) and bridge loans (a service allowing the seller to purchase a home before the revenue from the sale of their previous home is available).


Dosh is a Fintech platform that enables automatic cash backs for consumers. Its business model connects major card providers with online and offline local businesses to develop automatic cash back programs. The company makes money by earning an affiliate commission on each eligible sale from consumers.


E-Trade is a trading platform, allowing investors to trade common and preferred stocks, exchange-traded funds (ETFs), options, bonds, mutual funds, and futures contracts, acquired by Morgan Stanley in 2020 for $13 billion. E-Trade makes money through interest income, order flow, margin interests, options, future and bonds trading, and through other fees and service charges.


Klarna is a financial technology company allowing consumers to shop with a temporary Visa card. Thus it then performs a soft credit check and pays the merchant. Klarna makes money by charging merchants. Klarna also earns a percentage of interchange fees as a commission and for interests earned on customers’ accounts.


Lemonade is an insurance tech company using behavioral economics and artificial intelligence to process claims efficiently. The company leverages technology to streamline onboarding customers while also applying a financial model to reduce conflicts of interest with customers (perhaps by donating the variable premiums to charity). The company makes money by selling its core insurance products, and via its tech platform, it tries to enhance its sales.


Monzo is an English neobank offering a mobile app and a prepaid debit card for consumers and businesses. It was one of the first app-based banks to enter the UK market, founded by Gary Dolman, Jason Bates, Jonas Huckestein, Paul Rippon, and Tom Blomfield in 2015. All were employees of Starling Bank, a similar neobank challenging the dominance of established financial institutions in England. The company enjoys many revenue streams: business and consumer subscriptions, interchange and overdraft fees, personal loans, and more.


NerdWallet is an online platform providing tools and tips on all matters related to personal finance. The company gained traction as a simple web application comparing credit cards. NerdWallet makes money via affiliate commissions determined according to the affiliate agreements.


Quadpay was an American fintech company founded by Adam Ezra and Brad Lindenberg in 2017. Ezra and Lindenberg witnessed the rising popularity of buy-now-pay-later service Afterpay in Australia and similar service Klarna in Europe. Quadpay collects a range of fees from both the merchant and the consumer via merchandise fees, convenience fees, late payment, and interchange fees.


Revolut an English fintech company offering banking and investment services to consumers. Founded in 2015 by Nikolay Storonsky and Vlad Yatsenko, the company initially produced a low-rate travel card. Storonsky in particular was an avid traveler who became tired of spending hundreds of pounds on currency exchange and foreign transaction fees. The Revolut app and core banking account are free to use. Instead, money is made through a combination of subscription fees, transaction fees, perks, and ancillary services.


Robinhood is an app that helps to invest in stocks, ETFs, options, and cryptocurrencies, all commission-free. Robinhood earns money by offering: Robinhood Gold, a margin trading service, which starts at $6 a month, earn interests from customer cash and stocks, and rebates from market makers and trading venues.


SoFi is an online lending platform that provides affordable education loans to students, and it expanded into financial services, including loans, credit cards, investment services, and insurance. It makes money primarily via payment processing fees and loan securitization.


Squarespace is a North American hosting and website building company. Founded in 2004 by college student Anthony Casalena as a blog hosting service, it grew to become among the most successful website building companies. The company mostly makes money via its subscription plans. It also makes money via customizations on top of its subscription plans. And in part also as transaction fees for the website where it processes the sales.


Stash is a FinTech platform offering a suite of financial tools for young investors, coupled with personalized investment advice and life insurance. The company primarily makes money via subscriptions, cashback, payment for order flows, and interest for cash sitting on members’ accounts.


Venmo is a peer-to-peer payments app enabling users to share and make payments with friends for a variety of services. The service is free, but a 3% fee applies to credit cards. Venmo also launched a debit card in partnership with Mastercard. Venmo got acquired in 2012 by Braintree, and Braintree got acquired in 2013 by PayPal.


Wealthfront is an automated Fintech investment platform providing investment, retirement, and cash management products to retail investors, mostly making money on the annual 0.25% advisory fee the company charges for assets under management. It also makes money via a line of credits and interests on the cash accounts.


Zelle is a peer-to-peer payment network that indirectly benefits the banks’ consortium that backs it. Zelle also enables users to pay businesses for goods and services, free for users. Merchants pay a 1% fee to Visa or Mastercard, who share it with the bank that issued the card.

Read Next: Fintech Business Models, IaaS, PaaS, SaaSEnterprise AI Business ModelCloud Business Models.

Read Next: Affirm Business Model, Chime Business Model, Coinbase Business Model, Klarna Business Model, Paypal Business Model, Stripe Business Model, Robinhood Business Model.

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