Do US insurance companies pay for health costs with the income from premiums alone?

I always thought they did, and invested the profit in other ventures to pay shareholders. A friend of mine insists that they must invest the money to even pay for health costs. I must say it was the first time I had ever heard that.

Insurance companies do not leave their collected premiums just lying around awaiting distribution. That would be most stupid of them. The premiums are put to allowable uses. The subject is quite complex and the cause of much argument, because, of course, just what the collected premiums are doing while awaiting distribution can have a bearing on the ability to pay needed sums.

Obviously, to some extent, there is a pretty heavy cash flow through the pipeline, to be certain. :slight_smile:

Perhaps someone can shed more light upon exactly what ways premiums can be utilized while awaiting payment as benefits.

Insurance companies do not leave their collected premiums just lying around awaiting distribution. That would be most stupid of them. The premiums are put to allowable uses. The subject is quite complex and the cause of much argument, because, of course, just what the collected premiums are doing while awaiting distribution can have a bearing on the ability to pay needed sums.

Obviously, to some extent, there is a pretty heavy cash flow through the pipeline, to be certain. :slight_smile:

Perhaps someone can shed more light upon exactly what ways premiums can be utilized while awaiting payment as benefits.

Most insurance companies (health, life, P&C) will invest the premiums that they receive and will thus, to some extent, rely on investment income as well as premium income to pay claims and make profits.

I submitted too soon.

As an example: an insurer may invest in a range of things: short term cash; government bonds; corporate debt; equities; real property.

It will choose its investment strategy based on the expected returns from the various asset classes and the risks inherent within its liabilities (term; volatility; need for “real” asset growth to match inflation-linked claims payments).

Here is a site that talks about how insurers are rated: http://www.weisswatchdog.com/what_our_ratings_mean/insurer.asp

Notice the discusion of investment portfolio.

Here are the financials from

Blue Cross (MA): http://www.bluecrossma.com/common/en_US/repositories/CommonMainContent/aboutUs/AnnualReport/2005AnnualReport/Financials2005.pdf

Aetna (NY): http://www.ins.state.ny.us/exam_rpt/84450f02.pdf

In general, for health insurers, this isn’t true.

In insurance terms, the question you’re asking is, do health insurers have negative underwriting income? Underwriting income is premium less claims and expenses.

Property and casualty insurers often have negative underwriting income, because they have a long lag between when premiums are collected and when claims are paid. (For liability insurance especially, claims may take years to settle.) They can offset underwriting loss with investment profit, at least in the short term. (Over the long term, even P&C insurers don’t like to see underwriting loss.)

Health insurers, though, have a shorter time to settle and higher premium-to-surplus ratios. I’d be surprised if many health insurers were writing at a loss. I work in P&C, though, so I’m not very knowledgeable about health insurance economics, and I can’t find any good industry statistics.

do insurance compaines pay for anything these days