Question: if insurance companies did not make a profit, how would they pay out claims, which these days have to be huge?
Insurers are usually not paying claims out of profit. Premiums are typically set based on expected claims + expected admin + target profit margin. Note I said “expected” claims and admin because these items are not known. Actuaries project these amounts based on past experience and expected changes between the experience period and the rating period. The actual claims will vary from the amount built into the premium rates. Sometimes they are higher, sometimes lower. When the claims are higher than expected over an inusrer’s entire book of business, losses occur. Then the insurers must pay claims out of the reserves they maintain. One important purpose of profits is maintaining the reserve levels. Another is capital investment. Many insurers are non-profit, but they still build a “profit” component into their rates, they just call it something like risk charge or contribution to reserves. The for-profit insurers typically have profit margins that are higher than the 3% cited in the article. 3% is more typical of a non-profit BCBS plan, but that can be misleading because they may be making 3% on group business, but losing a ton of money on things like individual and Medigap due to political pressure to keep these lines “affordable”.
Profit is what’s left over AFTER paying out claims.