How Insurance Works


So how does insurance work?


Most of us understand the basic principle of insurance:  we pay a premium for an insurance policy which in turn offers us financial protection in the event of a sudden and accidental loss.  For example, we may pay a premium for collision coverage on our automobile. In the event of a collision loss, the insurance company would then pay to repair our vehicle.


But how does it REALLY work?


Many people have the misconception that Insurance companies over-charge and make a substantial amount of profit.  Based on a 7 year average (taken between 2007-2013), for every dollar collected in premium, Canadian insurers paid out the following:

  • $0.55 to policyholders for claims
  • $0.21 for operating costs
  • $0.16 back into the community through taxes
  • $0.08 profit


In reality, insurance companies utilize the skills of actuaries, who have expertise in the fields of economics, statistics, and mathematics. The actuaries help in the risk assessment and estimation of insurance premiums.  The insurance companies then apply to a rate board to have their insurance rates approved.


When determining what premium an individual will pay, an Insurance company will take many factors into consideration.  The premiums are calculated to reflect the probability that a specific person or business may suffer a loss.  The insurance company then uses a pool of the many premiums collected to pay for the losses of the few unfortunate ones who do suffer a loss.


Insurance companies also buy insurance from a reinsurer to cover unusually large losses.  These reinsurers operate around the world and pay for losses caused by major disasters.  If the reinsurers predict a year of exceptionally high losses they may increase their rates, which may in turn impact the premiums you pay.


Insurance companies compete with one another on price, coverage and claims service.  They utilize Brokers (like us) or Agents (who are employed directly by the Insurance Company) to sell their products.  They pay out a commission to the Brokerage or Agency for new and renewal business that is placed through them.


An insurance policy is meant to cover those risks outlined in the policy documents, which as mentioned above, are sudden and accidental.  Insurance does not pay for predictable events.


As an Insurance Broker, we represent multiple insurance companies and can provide you with expert guidance.  Our Team of knowledgeable Brokers work for YOU, our client, to find you the best value and coverage to suit your needs.  Our Brokers are not motivated by commission – they are compensated through a competitive salary and Team incentives.  Their motivation is to ensure that you are happy with our services and that you spread the word to your family and friends!


For more information on how insurance works and for a comprehensive policy checklist, we recommend reading “Insurance 101” on the Insurance Bureau of Canada’s (IBC) website.


Thank you!

The Costen & Associates Team