How does an insurer take on these risks?

Transferring risk from policyholders to the insurance company is at the very heart of what insurance companies do every day. Buying an insurance policy is purchasing a promise from the insurance company to pay on its guarantees and obligations. The insurer assumes risks in providing these guarantees for which it needs to be compensated in order to meet its commitment to policyholders and to maintain adequate capital and a viable business.

In order to provide guarantees insurance companies are required to hold capital and build reserves for their lines of business. The capital deployed has to earn a minimum required return that varies by company. Internal management as well as regulatory bodies and rating agencies rigorously monitor the sources, uses, risk, and return on capital. Profits earned increase capital levels, help preserve the financial strength of the company, and ensure that the company can meet contractual obligations, all of which benefits policyholders.