Final answer:
Insurance companies generate revenue through payments for policies and a return on investments. Premiums are paid by policyholders, and the investment return is from investing these funds in safe, liquid assets. This revenue must cover claims, operating expenses, and provide for profits.
Step-by-step explanation:
True, it is a fundamental operation of insurance companies to generate revenue through two main channels: receiving payments for policies (premiums) and a return on investments. The premiums are paid by policyholders for the insurance coverage, while the return on investments comes from investing the premiums that have been accumulated over time but not yet paid out in claims. Insurance companies focus on investments that are relatively safe and liquid to ensure they can cover claims, particularly during major disasters, without significant delays.
Figure 16.2 illustrates that the money flows into an insurance company through premiums and investments and out through the payment of claims and operating expenses. It must be noted that for insurance firms to be sustainable, the income from both premiums and investments must be sufficient to cover claims, operating costs, and allow for the firm's profits.