How do financial institutions make profit.?

Question

I intended to find out how Iinsurance firms, banks, mortage institutions etc make huge profit from the money people in a community invest into their care.Take insurance company for example, it receives money from those who want to insure their property or life. In future time, they payback this money in accordance with the policy made between both parties. How were they able to make profit on this money and even paid salaries of fellow employees . I hope to get the best of the best advice.

Answer 1

They in turn invest the money in approved investments and out of the interest or dividend, pay a small portion as bonus to the policy holder. All expenses are to be covered from the returns only.

Answer 2

Example 1:
You live in OnlyHonestPeopleVille and there are 100 cars and each year 2 of them crash with each other and one of the drivers dies.

The cheapest car is worth $100.00 USD and the most expensive car is worh $10,000.00 USD.

This means the insurance company could lose at least $200.00 in a year or up to $20,000.00 USD in a year.

They charge $200.00 to everybody every year (Total $20,000.00 every year)

Several things can happen:
2 $10,000.00 cars crash and they make $0.00
THIS IS THE ONLY CASE WHERE THE INSURANCE COMPANY DOES NOT MAKE ANY MONEY.

In the rest of the cases they always make money.

Now about the life insurance.
They pay $5,000.00 USD if you die in a crash.

There are 100 customers and they charge $50.00 to each one of them.

If one dies then they don't make any money.
If nobody dies then they make $5,000.00 in a year.

There is also possible 2 people will die in the same year and that's where the REINSURANCE COMPANIES COME IN.

There is also possible 3 $10,000.00 cars crash with each other and that's where the REINSURANCE COMPANIES COME IN.

I hope you understand.

If you need a more detailed answer then you can email me.