Is the insurance system a scam?

Great Debates
21

I work in the insurance industry. I’m not sure how a “not for profit” would work. Where would they get the capital? If provided by policyholders the premiums, at least initially, would have to be much higher.

With competition, and there is a lot of it, you would think that providers of capital to insurance companies, ie stockholders, would get a market return on the capital and no more.

As for “getting out all you put in” (whether collectively or not), no people don’t, but that should not be the issue, I don’t think.

Insurance is to provide peace of mind and to avoid economic dislocation. For example if you had a 500,000 house and a one in a thousand chance of it burning down, then the “fair premium” would be $5. But you would probably be willing to pay much more, to avoid the uncertainty.

If you’re uninsured house burned down and you were out 500,000 dollars it could ruin you and your family. This is not in society’s best interst to have people ruined by random events.

So suppose an insurance company charged you $10. $5 of that can be thought of as claim costs, the rest is for expenses, commissions, and profit. Suppose the company had to put up $10 of capital for every $500,000 house it insured. Then the “profit” would be divided by $10 to figure out the return on the shareholder’s equity.

This is only an example, of course. In actuality, in the property and casualty field, due to high claim costs, legal suits (many insure companies against being sued), etc, claims have been over 100% of premiums at times. Which means their only possible profit comes from investment income.

In most insurance companies the return on equity is maybe 10-15%. Not exactly minting money.

22

There is a difference.

In the case of health insurance, the cost of the uninsured is spread amongst all payers. I don’t argue that this is a fine state of affairs, but it is substantially different from the cost being borne by one unlucky victim, as is the case if an uninsured person damages another driver.

That’s not remotely comparable. While I buy uninsured motorist insurance as a hedge against disaster, the cost of that insurance is a function of the number of claims made under it by all insured persons. Eliminating the law requiring people to have liability insurance would likely dramatically increase the number of uninsured motorists and, in turn, increase the cost to me.

  • Rick
23

Buying insurance is like betting you will have problems. Betting against yourself in a way. If you think you won’t have problems… go ahead without insurance… you just saved a few hundred bucks a year.

Now if something happens… I drive sort of recklessly… so I prefer insurance. Hate the idea of working years on end to pay for one silly accident.

24

I too work in the insurance industry, and have worked for both sides (as a broker selling, and as a corporate risk manager buying).

To reinforce earlier posters, insurance against your liabilities (legal obligation for damage you do to others) is a public benefit - it protects the innocent victim and thus is often legally complusory.

Insurance against anything else should be a personal decision, based on the value offered by competitive products to you personally. The richer you are the more you generally spend on insurance (as countries’ GDP increase the proportional spend on insurance increases faster) but the higher your financial loss per loss even before it starts paying out (if you are a smart buyer).

Mutuals are a good idea in theory but under the global capital system they have a tougher time raising capital, and thus the cost of their capital increases. This is a drag on its competitive position. The profits may well go back to the policyholders but if the organisations as a whole is less profitable they may be no better off, often worse.

Where mutuals can show an edge is where they set themselves up to provide assistance and advice and support beyond the standard business models of insurance companies. The best examples I can think of are in the commercial world, where what are called “Protection and Indemnity Clubs” (ship owners mutuals) still provide the overwheming majority of the worlds ships liability cover.

25

I’m sure this seems like a good idea to you, but hey, the gummint doesn’t exactly have a reputation for running things in a cost-effective manner. When the government is in charge of something, there’s no profit motive. When individual companies compete, there is a profit motive, and it seems that everyone is better off this way.

26

There is no way a properly administrated insurance company could be run at a cost of sales of 1%. Only captive (wholly owned insurance companies of corporation which have NIL conflict of interest or moral hazard) insurers can approach this figure.

You have to have proper statistical controls, claims adjustment and presumably some sort of rating application to avoid adverse selection of risk. You simply cannot compare it to the social security benefit system, and in the UK that doesn’t run at 1% admin costs anyway.

27

Who insures the insurance companies, and then who insures the people who insure the insurance companies etc? Presumably government steps in at some point but do governments generally have insurance too?
Is it all circular and does it all come down to the taxpayer anyway in the end? :confused:

I agree that insurance does provide peace of mind and I suppose if you want to take the worst case scenario it is necessary or rather ‘desireable’. However it’s still just gambling plain and simple just like trading or any other investments. Just shuffling money around, letting a few people cream a little off the top at various points on the journey… It’s a crazy world really - a crazy world that forces us to buy stuff we don’t use, to buy a concept rather than something tangible. It doesn’t really pay to think about it too much. It would just addle your brain.

(I feel sleepy today - sorry if this is lazy and garbled)

28

Galen WTF?

Social (in)security is going bankrupt right now. What makes you think that a government program could more efficiently supplant private industry? By 2029 the Social Security system will be bankrupt unless something drastict is done now.

clairobscur—Mutual Insurance companies are getting less and less. Many mutual companies in the past several years have de-mutualized in order to raise capital for acquisition and growth. You are correct about mutual companies though in that they are managed for the policy holders because the policy holders “own” the company to the amount of which their policy is worth. There are just a few Life Insurers which are mutual companies and a few property & casualty insurers but I don’t know of any health insurance companies which are set up this way. At least with the mutual companies the profit is paid back to the policy holders in the form of dividends.

For the other companies which are now stock companies the policy holders are the LAST people to get paid a dividend. The stock companies only pay dividends to stock holders NOT policy holders.

29

Well everyone will use life insurance sometime. I haven’t met anyone yet who has managed cheat death for much longer than a 100 years or so. So if you bought a life insurance policy eventually your family will use it to put you in the ground, pay off your debts, put a little aside to stay in their own world.

If you had a goose that laid golden eggs every day wouldn’t you want to insure her so that if she died you could still get the value for the golden eggs you are not getting? Likewise if you are earning a living and you have a family that depends on your income wouldn’t it make sense to insure you so that if you died they would still get the value you brought to the family? Of course if you don’t love anyone then you don’t need insurance.

30

Contractually reinsurance companies insure the insurance companies and each other. Strictly speaking government does not step in except in certain exceptional circumstances where they have policy objectives they wish to promote or see the need for insurance but the markets do not want to play ball. Examples are, in the UK, onshore property terrorism insurance market which collapsed after the St. Mary’s Axe IRA bomb in the City of London, and some export credit guarantee insurance.

There are a handful of global supermajor reinsurers (including Swiss Re, Munich Re) that do end up with large dollops of risk on their books but the seem to manage it pretty well without the need for direct government aid.

Sadly of course there is a history of companies that are bailed out by the government (i.e taxpayers) when they get things so badly wrong they deserve to go out of business but less in the insurance sector as compared lets say to the airline industry.

31

Well there is a dispersion of risk involved with insurance.

If you have a one in a 1000 chance of a 1M dollar loss, that’s a wide dispersion. Your loss will either be 0 or 1M. So you will either be just fine or completely ruined.

If an insurance company insures 10,000 people like you, it’s expected loss will be 10M dollars. And the variability about that 10 M is much less. I don’t have a book infront of me, but you could probably assume that there is a 95% chance the loss is between 8M and 12M dollars. So the insurance company benefits by spreading the risk.

Insurance companies have insurance also. They could buy re-insurance to protect them if the loss turned out to actually be 20M or above.

The service they provide is risk sharing. It’s a real good, not something theoretical.

32

The insurance system is legalized gambling, with all the corruption and government toadyism that implies.

The system we live with makes forces you to place a bet with the insurance industry: you bet that you will get sick, they bet that you won’t. Since the government has handed them all the rights as far defining what “sick” is and even whether they will even take your bet in the first place, it’s never been truer that “the House always wins.”

Insurance is corrupt to it core and its primary function is to enrich itself; covering some people’s medical costs is just a necessary evil.

33

Insurance is like gambling in the sense that it’s a matter of game theory and of risk tolerance.

Let’s assume a “large” amount of $100,000 and a “small” amount of $1,000. (These semi-arbitrary numbers are a typical auto insurance policy’s liability coverage, and a WAG at a typical annual premium.)

Gambling: Which of the following two games would you prefer to play?
a. A certain win of $1,000.
b. A tiny chance (under 1:1000) of winning $100,000.

Insurance: Which of the following two games would you prefer to play? NOT playing is not an option.
a. A certain loss of $1,000. (The premium you pay.)
b. A tiny chance (under 1:1000) of losing $100,000.

It’s a point of Human nature (risk averse to losses, to be precise) where people play gambling game b, and pay insurance plan a. People generally will prefer to pay some small amount to avoid the possibility of a large loss.

34

What risks are covered by insurance is a straightforward matter of contract law: if you think your insurance carrier isn’t providing you broad enough protection for the premiums you’re paying, you are free to switch to another carrier or to forego carrying insurance altogether. The government doesn’t “hand” them the rights to craft their policies; they have the right to do that just like any business has the right to craft its own contracts with its customers. Indeed, to the extent the government does step in and require certain things in insurance contracts, it’s generally stuff that is pro-insured, not pro-insurer. **

You mean…my God…insurance companies aren’t charities!?! They’re for-profit enterprises!?! They don’t just provide benefits out of the goodness of their hearts, but because they think they can make money at it???

Oh, the humanity!

:rolleyes:

35

What Scuba_Ben is illustrating here is the bennefits of insurance as part of a portfolio of assets.

Insurance on it’s own is a bad investment.

Every investment decision is evaluated in terms of it’s expected rate of return. Lets say I offer to make a contract: I flip a coin and pay you $100 if it’s heads, and you owe me $1 if it’s tails. Anybody is able to tell that this is a good investment and would do it. The expected rate of return for this investment is about $49.

I don’t have the numbers in front of me, but if you evaluate insurance on it’s own it is a bad investment. There is a negative expected rate of return.

(You need to have the amounts of premiums and expected payout and % chance of actually using the insurance. We did this for a finance class when I was in college.)

However, insurance is good to have because it isn’t just a stand alone investment, other assets are brought into the picture. Scuba_Ben’s 100K. Or your house. Or your car. These are assets that people do not want to lose. So much so, that they are willing to invest in a bad investment (insurance) in order to have a guarantee not to lose them.

Only when looking at a portfolio does insurance become a good investment.

36

Oh, and where did you go to school, Colinmarshall? Your teacher sounds like a dolt.

37

Which is exactly why insurance should not be mandatory. When the government tampers with the free market by reducing the buyer’s options, including the right not to buy at all, prices are inflated and service declines. Or are you suddenly against the free market when it doesn’t suit your personal interests?

38

The only insurance I know of that is ‘mandatory’ is auto insurance, and that is to protect other drivers, not you. You don’t have to have collision for your own car, for instance.

I see it as a cost of being allowed on our nations roadways. You want to drive, you have to assure all of us that you won’t wreck someones car and not compensate them.

Other than that, what insurance is mandatory?

Home insurance is mandatory only if you want a mortgage.
Health insurance isn’t mandatory at all.
Life insurance, not mandatory at all.
Collision insurance is mandatory only if you have a lease/loan.

39

Any HONEST gambling game favors the house. Anyone who claims that their gambling game favors the player is either lying or running a dishonest game. This is true whether you are talking about roulette or insurance.

40

lissener was talking about health insurance, which is not mandatory, at least not in this country, and my response to him was phrased accordingly. Automobile collision insurance was not what he was bitching about.