So how does an insurance company work? Many of us have bought insurance policies without stopping to think about how the company actually makes their money. So let's think about it from the company's perspective. And as with all companies, it starts with a customer. Now, similar to banking, individual customers are referred to as retail customers whilst companies are referred to as corporates or commercial customers. The customer asks the insurance company for a policy and the customer then becomes a policy holder. This policy is, effectively, an agreement between the insurance company and the customer. And under this agreement, the customer has to pay an amount of money to the insurance company. This is the premium. In exchange for this, the insurance company will pay an amount of money to the customer at some point in the future if a certain event occurs, and this payment is a claim. The event which triggers the payment is referred to as a loss event. And that could be, for example, damage to a physical property such as the home, and that would be home insurance. Or, the loss event could be financial loss by a company, and that would be commercial insurance. Or, the loss event could be the death of an individual, and that would be life insurance. The time between the start of the policy and the point where it expires is referred to as the coverage period. So how does the insurance company actually make money from this? Well, the first one is probably the most obvious and that is by ensuring the premium received by the insurance company is greater than the amount of future claims. Then the insurance company will make a profit from this, and that's referred to as the underwriting profit. But there is a second, more subtle way that the insurance company can make money, and that is because the premium is received by the insurance company before any claims are paid out. This premium effectively provides a free source of funding to the insurance company. The insurance company can then invest this money and generate a return from this. Now, this investment return is an important sort of profits for the insurance company and will be factored in by the company when they are pricing the premium at the beginning.