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It is comparatively simpler to understand this source of money. Everybody knows that insurance companies charge a periodic (usually monthly) premium for every kind of service they offer or provide. However, at its depth it can still be very complex. Companies don’t make premium policies out of blue. In an ideal situation, an insurance company would try to price its premium in a way that the total annual amount gathered in terms of premium is equal to total claims paid plus all the expenses incurred in the year. Such a pricing can be very difficult to set. A lot of statistical and analytical tools are used for this purpose and budgets are made accordingly. At the same time, targets are set for each division or office and that is why you would also see insurance agents always trying to persuade you into buying their policies. All these agents have insurance targets which they need to meet.

When insurance companies earn premium, they don’t simply keep their money in banks and wait for claims to be filed. Instead, they always invest a big portion of their money into long term investments, such as money market funds, real estate and low-risk bonds. Many insurance companies in the United States own their own skyscrapers which are rented in order to earn regular income. Similarly, other investments are also made in order to ensure continuous stream of income for the foreseeable future.
Again it is not a simple decision of investing money as a lot of technical things need to be considered. One of the biggest things insurance companies need to consider is the amount of investment they must make. Too little or too big an investment can be very risky. These investments are for long term, such as 20 years, and companies have to consider the amount of quick money they may need during the year (to pay for claims for example). Similarly, insurance companies need to analyze each investment thoroughly as wrong investments could potentially bankrupt the company.
Today, most insurance companies try to achieve a stable and minimally risky portfolio of investment. This means that the risk associated with investments is minimized and the cash inflow (return on investment) is also stable. However, it can be a very complex process and insurance companies take help of experienced analysts and investors in order to ensure success.

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