Have you ever wondered how an auto insurance company stays in business? At first glance, it seems like a no-brainer; obviously, they make money because they sell a product that people are legally required to purchase. But consider this: the average person pays around $900 a year for auto insurance. While that sounds like a large amount, it is nothing compared to how much a single car accident can cost.

For a minor car accident involving two vehicles, an insurance company could easily pay out double, triple, or many many times over your annual premium. If there are bodily injuries involved, tens of thousands of dollars or much much more could be paid out.

You’re hoping that you won’t have to actually use your auto insurance, but if you do, it will have easily paid for itself after just one accident. Not surprisingly, many auto insurers pay out more for claims each year than they bring in from premiums. So just how do they stay in business without charging sky-high premiums?

Investments in Insurance

Investments, that’s how. Your insurer makes money by taking most of the money that they take in and investing it in stocks and bonds. The better their investments perform, and a lower claims-to-premium ratio that is paid out, the more competitive the rates they’re able to charge their customers. In order for insurance companies to be profitable, insurers must earn more from premiums, which are invested across a range of asset classes, including stocks and corporate bonds, than what they pay out in claims.