Insurance companies guarantee payments for uncertain future events. This event can cover damage to physical property, for example, home insurance, or the death of an individual, for example, life insurance.

The type of policy has an important impact on the length of the policy. A typical home insurance policy is for one year, whilst a life insurance policy will cover many decades.

So how does an insurance company make money? The first way is probably the most obvious, by ensuring that the premium they charge is greater than the value of the expected claim.

In this way, they make a profit from writing the policy.

This is referred to as the underwriting profit.

However, there is a second way that insurance companies make money, and that's because the insurance company receives the insurance premium before the claim is paid out.

This premium effectively provides a free source of funding to the insurance company. They can invest this money until the claim occurs and generate an investment return.