Insurance companies pay customers’ covered losses primarily from the pool of premiums collected from all policyholders, supplemented by investment income and backed by reinsurance for very large events.

Main funding sources

• Policyholder premiums. Premiums from many customers are pooled; approved claims are paid out of this pool according to the policy terms.

• Investment income. Insurers invest the premium float (e.g., in bonds and other assets), and those returns help fund claim payments and operating costs.

Risk spreading and backup

• Risk pooling. The core model spreads the cost of individual losses across the whole insured group, so a few claims can be paid from many people’s premiums.

• Reinsurance. Insurers buy “insurance for insurers” to transfer part of their risk to reinsurers, providing extra capacity to pay for catastrophes and unusually large loss events.

How money reaches claimants

• Once a covered loss is verified, insurers disburse proceeds by check, direct deposit, or by paying third parties (such as contractors or lienholders) directly, depending on policy and claim type.