How insurance companies make money
From Progressive's 2025 annual report · Every number cited · Updated
The short answer
Insurance companies make money two ways: charging more in premiums than they pay out in claims and running costs, and investing the premiums until the claims come due. Through one insurer, Progressive, which says it's the second-biggest car insurer in the US by premiums: drivers and businesses paid it $81.7B
After claims and costs it kept $12.60
Key numbers
- $81.7B
sec.gov ·2025 Premiums earned in a year
- 87.4%
sec.gov ·2025 Combined ratio: claims and costs as a share of premiums
- 25.2%
sec.gov ·2025 Of profit before taxes from investing the premiums
- $11.3B
sec.gov ·2025 Net income in a year
Rather try it? The free lesson uses the same numbers, hands-on.
Premiums in, claims out
Customers pay first; crashes, stolen cars and hail come later. Out of every $100
Insurers track this with the combined ratio: claims plus running costs, as a share of premiums. Under a hundred percent, insuring made money. Progressive's 2025 ratio was 87.4%
- Claims, and settling them: $65.90
- Selling policies and running the company: $21.50
- Left from insuring: $12.60
Where an example $100
Sources:sec.gov ·2025
The money in between: the float
Premiums arrive before the claims. At the end of 2025 Progressive was holding $43.3B
Progressive invests it in the meantime: it had $97.4B
Good years and bad years
Claims don't cost the same every year. When repairs, used cars and medical bills got pricier, Progressive's combined ratio crept close to its goal, and in 2022 its net income fell to $722M
Once prices caught up with claims, it spent to grow: advertising went from $1.6B
Storms are the wild card. Progressive's losses from hurricanes, hail and tornadoes fell from $2.5B
- 2021: 95.3%
- 2022: 95.8%
- 2023: 94.9%
- 2024: 88.8%
- 2025: 87.4%
Progressive's combined ratio, year by year, against its goal of 96%
Sources:sec.gov ·2025
Common questions
- What is a combined ratio?
Claims plus running costs, as a share of premiums. Under a hundred percent, the insurer made money from insuring; over it, it paid out more than it took in. Progressive's was 87.4%
sec.gov ·2025 in 2025, against its goal of 96% sec.gov ·2025. - Why do car insurance rates go up?
Because claims cost more. A claims bill is how many claims times what each one costs, and pricier repairs, car parts and medical bills push it up. Rate changes also go through each state's rules: Progressive's report says state insurance departments oversee its rate levels.
- How much profit does Progressive make?
$11.3B
sec.gov ·2025 of net income in 2025. Before taxes it was $14.2B : $10.2B sec.gov ·2025 from insuring and the rest mostly from investing the float.
Try it yourself
Free lesson · 9 min
How insurance works
The hands-on version of this page: guess the numbers, read Progressive's real report, and make the boss's calls yourself.
The ideas behind it
- What could go wrong?(members-only)