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What does an insurance company do with the premiums it collects?
AHolds them as cash until a policyholder makes a claim
BPasses them to a central fund that insures deposits
CInvests them in stocks, bonds, property, and loans
DLends them back to policyholders at a favourable rate
Answer & Solution
Correct answer: C. Invests them in stocks, bonds, property, and loans
1. Premiums are not left idle waiting for claims.
2. Insurance companies invest them in stocks, bonds and real estate.
3. They also place them in business loans and in real estate loans for large projects.
4. This investing is exactly what makes an insurance company a major supplier of funds to the financial system.
5. Holding everything in cash would earn nothing, so no insurer works that way.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 15 "Understanding Money and Financial Institutions", section 15.3 U.S. Financial Institutions_
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