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Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 7:31 am
by B4Xt3r
Hi,

I'm curious if anyone knows an estimate for what fraction of insurance companies revenue goes to paying out claims? It might vary by what type of insurance, so if you have an estimate, please state which insurance product you know about.

Thanks!

-b4xt3r

(I don't want to this to derail the thread, but what I'm internally curious about is how much I am overpaying to mitigate the risk that insurance is meant to cover. I'm sure a portion of my premiums go to overhead, profit, regulatory expenses, etc. The question isn't really if I am overpaying, but by how much.)

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 8:15 am
by HueyLD
There is a trade magazine and an insurance agent should have access to that information.

I recently saw a page of the payout ratios by insurance. State Farm paid out more than it collected by IIRC 20% and some others seemed to pay out very little.

So, what does it mean? For those that pay out a small % of revenues, they could be a real pain whenever you need to file a claim because their payouts are low for many reasons and one of the reasons could be that they make your life hell to file claims. However, a company that pays a lot more than it collects will have to raise its premiums in the near future to stay in business. And not to forget that all property insurance premium rates are state and location specific. Even within the same town, moving to a different zip code may result in higher or lower premiums even without other changes.

You can probably get this information from an independent insurance agent. Keep in mind that cost is not the only factor to consider if the company will make it virtually impossible to file a claim.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 8:24 am
by AlohaJoe
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am
Hi,

I'm curious if anyone knows an estimate for what fraction of insurance companies revenue goes to paying out claims? It might vary by what type of insurance, so if you have an estimate, please state which insurance product you know about.
Can't you just go read the annual financial report for any public insurance company?

In 2017 State Farm reported $42 billion in premiums earned and $32 billion in claims, $5 billion on expenses for paying claims, and $10 billion for service and administrative fees for a net underwriting LOSS of 4$ billion.

Throw in dividends to policyholders and 2017 was a clear winner for people who held insurance.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 8:53 am
by miamivice
Generally, my understanding is claim payouts plus admin expenses is about a wash compared to premiums.

Where insurance companies win is they invest the premiums and make money off the investments. I have never verified if this is true.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 9:37 am
by Stinky
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am
Hi,

I'm curious if anyone knows an estimate for what fraction of insurance companies revenue goes to paying out claims? It might vary by what type of insurance, so if you have an estimate, please state which insurance product you know about.

Thanks!

-b4xt3r

(I don't want to this to derail the thread, but what I'm internally curious about is how much I am overpaying to mitigate the risk that insurance is meant to cover. I'm sure a portion of my premiums go to overhead, profit, regulatory expenses, etc. The question isn't really if I am overpaying, but by how much.)
There's no single answer to your question. There is significant variation by type of business.

As AlohaJoe noted above, State Farm showed an underwriting loss on its P&C business in 2017. They made up the difference on investment income on the funds that they're holding.

Many term life insurance products have a 50-60% payout of death claims compared to premium. The remainder goes to agent commissions, underwriting and policy issue expenses, administration expenses, and taxes. Profits are a relatively small part of premiums.

At the opposite end of the spectrum are extended warranty contracts. There is tremendous variation by kind of product. Some items like electronics might have a 10-20% payout. Auto extended warranties have a higher payout rate, but usually have very large commissions to the car dealers who sell them.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 9:51 am
by jbmitt
You’re looking for their loss ratio and combined ratio data. Many insurers can tolerate a combined ratio (expenses and loss payments) in excess of 100 because of their investment income. It’s not a solid long term strategy, but the insurers I worked for recognized that it happens during periods of business.

Most mutuals should publish this information.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 10:36 am
by inbox788
Stinky wrote:
Thu Mar 14, 2019 9:37 am
Auto extended warranties have a higher payout rate, but usually have very large commissions to the car dealers who sell them.
There's a lot of funny accounting taking place, so it's not fair to compare numbers or percentages. Term life insurance pays out a high percentage and is relatively simple to account for premiums, death benefits, sales and marketing costs, commissions, administrative expenses, and profits. An auto extended warranty pays out service, which is market up, often a lot, so there are hidden costs. If you charged 5 times what independent service stations charged for the service, you could pay out 100% and still make money, while subsidizing profits and commissions and other expenses on the warranty side of things. The electronic warranties can have a similar effects. Auto makers are more than likely making lots of profit on many fronts. Don't forget finance charges and service charges and how they fit into some calculations, but not others depending on what you're trying to show.

Do you count the revenue of everyday prices or try to consider all the markups and discounts and rebates?
https://abcnews.go.com/Business/jc-penn ... d=19323843
jbmitt wrote:
Thu Mar 14, 2019 9:51 am
You’re looking for their loss ratio and combined ratio data. Many insurers can tolerate a combined ratio (expenses and loss payments) in excess of 100 because of their investment income. It’s not a solid long term strategy, but the insurers I worked for recognized that it happens during periods of business.
Float and investment income, yet another benefit to the insurance company!

https://www.businessinsider.com/warren- ... oat-2017-4

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 12:14 pm
by bottlecap
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am
The question isn't really if I am overpaying, but by how much.
This does not compute. Your premise appears to be incorrect.

That is the beauty of a marketplace: companies compete to provide you with the best product for the at the lowest cost.

Even "profit" is not something you "overpay" for. It is the surest way to know you aren't overpaying.

Health insurance is a bit of an exception because the product and price is almost entirely regulated.

Other than that, It's a little bit of a simplification, but if you shop around to get the lowest rates, you are not overpaying. You can over-insure, of course.

JT

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 12:41 pm
by NoProbLlama
I'm not exactly sure what OP is hoping to glean from this information. But I'd caution against drawing the conclusion that more claims/revenue equates to more efficient operations and/or pricing.

There can be significant risk to under-priced products in insurance, and lower prices should not be the sole metric when purchasing insurance.

Long Term Care is the textbook example of actuarial mispricing. OPs metric would have been interesting for Penn Treaty in the years leading up to their liquidation in 2017. Genworth's current situation with life insurance products also comes to mind.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 12:58 pm
by nisiprius
For health insurance, they are required to disclose this information--at least, they are required to in my state, but I think it's everywhere, at least for ACA and for Medicare supplemental. It is sometimes called the "medical loss ratio" but my most recent Medicare supplemental "outline of coverage" calls it the "benefits to premium ratio" and states that it is 85%; that is, they expect to pay out $0.85 in benefits for every dollar of premium. In some states on some policies at some times it was as low as 60% or even lower.

I looked into this once for SPIAs, where it is sometimes called the "moneys' worth" percentage. There are varying estimates in varying places, they are not required to disclose it, but it is on the rough order of maybe 10%, i.e. 90% gets paid out, 10% is profit for the insurance company.

I get the impression that the rough numbers are like 10%-20% or so. They are paying out "almost all" of it, yet keeping "an awful lot" of it. Some of it is legitimate compensation for the risk they are taking, though.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 1:00 pm
by pshonore
This can vary widely by line of insurance. As an example Fire claims are generally reported and settled quickly. Other lines like Workers Comp and Bodily Injury can take years to settle and finalize. But you may be able to invest some portion of the premiums and earn a return. People also underestimate expenses like agent commissions, legal fees for defense attorneys, expert testimony, etc. I would guess most companies are paying out around 100% or more when all and said and done and you include all expenses. And then there are lines of business like a Surety Bond where losses are not expected but of course can happen and where the Obligor may be required to post collateral.

All companies usually report the combined underwriting ratio to the State Insurance Dept.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 2:21 pm
by Ron
Don't forget that a lot of claims are not paid by the primary insurance company, but are covered by reinsurance firms.

- Ron

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 2:28 pm
by Mike Scott
Our group health insurance quotes are based on a 15% projected difference between premiums and claims. Last year they were -17% at the end of the year. I expect premiums will keep going up.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 8:08 pm
by B4Xt3r
Huh, so the above replies seem to indicate that the insurance industry was more efficient than I thought it was. I was expecting something more like only 50%... How is it that all of the overhead, profit, salaries, taxes, business expenses don't eat up more?

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 8:16 pm
by AlohaJoe
B4Xt3r wrote:
Thu Mar 14, 2019 8:08 pm
Huh, so the above replies seem to indicate that the insurance industry was more efficient than I thought it was. I was expecting something more like only 50%... How is it that all of the overhead, profit, salaries, taxes, business expenses don't eat up more?
It seems like a high school textbook version of capitalism is a pretty good explanation. If expenses ate up more, then someone else would figure out how to be more efficient and keep more profit. Then someone else would [/i]also[/i] figure out how to be more efficient and, instead of keeping more profit, would lower prices to win market share. And so on and so on.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Thu Mar 14, 2019 8:24 pm
by SandysDad
If you want one that will make your blood boil, look at Title Insurance for real estate.

The payout ratio is 5%. No I did not forget a zero!

I had a claim once, it was borderline fraud the way they tried to tell me they did not have to pay and I was not insured for the matter at hand. Had to hire my own lawyer, who threatened them with legal action. They still would not move. Only when my attourney gave them a date that we were filing in State Court (at my insistence she do so), did they budge and pay out.

I always buy title insurance, but it is a ripoff. Basically look at it as payment to your settlement company and if your home purchase is a large dollar value (like $1M+), settlement should be free as the title insurance is more than enough comp IMHO.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Fri Mar 15, 2019 11:13 am
by megabad
I don't get it. What does paying claims have to do with overpaying? I am sure it varies wildly from company to company and year to year. Why not just shop your policy and compare total premiums for the exact same coverage and same AM Best rating? This would be a much more effective way of determining if you are overpaying.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Fri Mar 15, 2019 11:45 am
by Artful Dodger
I can speak pretty knowledgeably about group health insurance, as I was a carrier rep for 19 years, then a broker/consultant for another 19.

As mentioned above, in the insured small group and individual market, since the ACA, the law has required carriers maintain a 80% loss ratio for individual and groups 2-50, and a 85% loss ratio for insured groups of 50 and greater. It is an average over their book of business, so you will have individual clients / groups with greater or lesser loss ratios. The carriers are required to do an audit, and if their book of business aggregate expenses exceeded the 20% or 15% benchmark, they are required to provide a MLR (medical loss ratio) rebate of the difference to their customer. Most carriers have been able to adjust their business model so rebates are more rare than in the beginning.

In the 50 to 150 market, most carriers have expenses below the 15%, some as low as 10%. Above 150 lives, they are even lower. A number of the carriers are not for profits, so there is no profit in the expense fee. Those who are for profit (UHC, Aetna, Humana, etc.), usually keep 3 to 4 percent of the premium.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Fri Mar 15, 2019 11:54 am
by willthrill81
bottlecap wrote:
Thu Mar 14, 2019 12:14 pm
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am
The question isn't really if I am overpaying, but by how much.
This does not compute. Your premise appears to be incorrect.

That is the beauty of a marketplace: companies compete to provide you with the best product for the at the lowest cost.

Even "profit" is not something you "overpay" for. It is the surest way to know you aren't overpaying.

Health insurance is a bit of an exception because the product and price is almost entirely regulated.

Other than that, It's a little bit of a simplification, but if you shop around to get the lowest rates, you are not overpaying. You can over-insure, of course.

JT
I believe the OP is referring to the fact that the expected value of insurance to the insured is virtually always negative (only in certain situations when premiums can be paid for with pre-tax dollars have I seen the expected value be positive). If it wasn't, insurance companies would go bankrupt.

I agree with your point and others that most insurance markets are competitive enough that the expected value of insurance is not generally very deep in the red.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Fri Mar 15, 2019 2:13 pm
by quantAndHold
Insurance isn’t an investment, and it really isn’t useful to evaluate it that way, unless you’re investing in insurance companies.

Insurance is, however, an important and useful part of personal financial planning. It turns out that having protection against being wiped out when a catastrophe happens is a good thing.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Fri Mar 15, 2019 2:37 pm
by willthrill81
quantAndHold wrote:
Fri Mar 15, 2019 2:13 pm
Insurance isn’t an investment, and it really isn’t useful to evaluate it that way, unless you’re investing in insurance companies.

Insurance is, however, an important and useful part of personal financial planning. It turns out that having protection against being wiped out when a catastrophe happens is a good thing.
:thumbsup

The value in paying someone else to take on catastrophic risk for you is definitely not to be underestimated.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sat Mar 16, 2019 10:48 am
by B4Xt3r
willthrill81 wrote:
Fri Mar 15, 2019 11:54 am
bottlecap wrote:
Thu Mar 14, 2019 12:14 pm
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am
The question isn't really if I am overpaying, but by how much.
This does not compute. Your premise appears to be incorrect.

That is the beauty of a marketplace: companies compete to provide you with the best product for the at the lowest cost.

Even "profit" is not something you "overpay" for. It is the surest way to know you aren't overpaying.

Health insurance is a bit of an exception because the product and price is almost entirely regulated.

Other than that, It's a little bit of a simplification, but if you shop around to get the lowest rates, you are not overpaying. You can over-insure, of course.

JT
I believe the OP is referring to the fact that the expected value of insurance to the insured is virtually always negative (only in certain situations when premiums can be paid for with pre-tax dollars have I seen the expected value be positive). If it wasn't, insurance companies would go bankrupt.

I agree with your point and others that most insurance markets are competitive enough that the expected value of insurance is not generally very deep in the red.
Yes, that is what I am referring too. So for harms that are less than my emergency fund, isn't it prudent for me to self-insure?

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sat Mar 16, 2019 10:49 am
by willthrill81
B4Xt3r wrote:
Sat Mar 16, 2019 10:48 am
willthrill81 wrote:
Fri Mar 15, 2019 11:54 am
bottlecap wrote:
Thu Mar 14, 2019 12:14 pm
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am
The question isn't really if I am overpaying, but by how much.
This does not compute. Your premise appears to be incorrect.

That is the beauty of a marketplace: companies compete to provide you with the best product for the at the lowest cost.

Even "profit" is not something you "overpay" for. It is the surest way to know you aren't overpaying.

Health insurance is a bit of an exception because the product and price is almost entirely regulated.

Other than that, It's a little bit of a simplification, but if you shop around to get the lowest rates, you are not overpaying. You can over-insure, of course.

JT
I believe the OP is referring to the fact that the expected value of insurance to the insured is virtually always negative (only in certain situations when premiums can be paid for with pre-tax dollars have I seen the expected value be positive). If it wasn't, insurance companies would go bankrupt.

I agree with your point and others that most insurance markets are competitive enough that the expected value of insurance is not generally very deep in the red.
Yes, that is what I am referring too. So for harms that are less than my emergency fund, isn't it prudent for me to self-insure?
Yes. It is mathematically optimal to self-insure risks when you can do so.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sat Mar 16, 2019 10:51 am
by B4Xt3r
willthrill81 wrote:
Fri Mar 15, 2019 2:37 pm
quantAndHold wrote:
Fri Mar 15, 2019 2:13 pm
Insurance isn’t an investment, and it really isn’t useful to evaluate it that way, unless you’re investing in insurance companies.

Insurance is, however, an important and useful part of personal financial planning. It turns out that having protection against being wiped out when a catastrophe happens is a good thing.
:thumbsup

The value in paying someone else to take on catastrophic risk for you is definitely not to be underestimated.
Hi willthrill81,

Isn't this a bit of a trueism? I mean, any risk should never be underestimated. Thankfully, most insurance companies will provide me with a free quote that allows me a rather accurate estimate of the expected harm.

-b4xt3r

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sat Mar 16, 2019 10:53 am
by B4Xt3r
willthrill81 wrote:
Sat Mar 16, 2019 10:49 am
B4Xt3r wrote:
Sat Mar 16, 2019 10:48 am
willthrill81 wrote:
Fri Mar 15, 2019 11:54 am
bottlecap wrote:
Thu Mar 14, 2019 12:14 pm
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am
The question isn't really if I am overpaying, but by how much.
This does not compute. Your premise appears to be incorrect.

That is the beauty of a marketplace: companies compete to provide you with the best product for the at the lowest cost.

Even "profit" is not something you "overpay" for. It is the surest way to know you aren't overpaying.

Health insurance is a bit of an exception because the product and price is almost entirely regulated.

Other than that, It's a little bit of a simplification, but if you shop around to get the lowest rates, you are not overpaying. You can over-insure, of course.

JT
I believe the OP is referring to the fact that the expected value of insurance to the insured is virtually always negative (only in certain situations when premiums can be paid for with pre-tax dollars have I seen the expected value be positive). If it wasn't, insurance companies would go bankrupt.

I agree with your point and others that most insurance markets are competitive enough that the expected value of insurance is not generally very deep in the red.
Yes, that is what I am referring too. So for harms that are less than my emergency fund, isn't it prudent for me to self-insure?
Yes. It is mathematically optimal to self-insure risks when you can do so.
Emphasis mine, and I agree with it fully. For many people it may not be also optimal to self-insure risks when they can do so. Emotional well-being has huge, real value, even though many people discount it.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sat Mar 16, 2019 11:24 am
by jminv
Life insurance loss and expense ratios vary quite a bit but the life insurance market in the United States is very competitive. This means that it is not uncommon for the combined ratio (loss + expense ratio) to be > 100%. This means that life insurers have lax underwriting/pricing standards in order to obtain premiums, which they then invest. There are US insurers that have a combined ratio <100% too but there are a lot around and above the 100% mark. Life insurance outside the us (and especially in the developing world) tends to have a combined ratio <100%, which means the insurer is both writing profitable policies and earning investment returns on the premiums.

As an example, Metlife in 2018 had a loss ratio of 97% and an expense ratio of 24% for a combined ratio of 121%. There are insurers with much lower expense ratios, saw one that was 8.9%, which is likely due to their sales model.

This, of course, only says something about the average policy. It doesn't say anything about your policy. You can shop around for competitive quotes to essentially pick the insurer with the most lax standards for your risk profile. If you have some piece of information about your own health which an insurer would not know and which would result in a very mispriced risk, then that could also help.

As to your question about why the expense ratio is low, it doesn't cost much to administer the policies once they are in force. It costs money to acquire policy holders but once in force, expenses are low to essentially non-existant. People stick with their policies for a long time and don't switch which is a nice feature if the risk was priced appropriately. Then if a claim is made, the process is normally straightforward and involves a call or two to the insurer by the beneficiary, filling out some forms, and mailing the forms plus the death certificate to the insurer.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sat Mar 16, 2019 11:36 am
by IMO
AlohaJoe wrote:
Thu Mar 14, 2019 8:24 am
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am
Hi,

I'm curious if anyone knows an estimate for what fraction of insurance companies revenue goes to paying out claims? It might vary by what type of insurance, so if you have an estimate, please state which insurance product you know about.
Can't you just go read the annual financial report for any public insurance company?

In 2017 State Farm reported $42 billion in premiums earned and $32 billion in claims, $5 billion on expenses for paying claims, and $10 billion for service and administrative fees for a net underwriting LOSS of 4$ billion.

Throw in dividends to policyholders and 2017 was a clear winner for people who held insurance.
Makes me want to pay my insurers extra to help them get by. :happy

I suspect there's lots of fluff in those outgoing numbers. Also the CEO's seem to have been clear winners despite
apparent huge losses:

https://www.insurancebusinessmag.com/us ... 99975.aspx

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sat Mar 16, 2019 5:19 pm
by quantAndHold
IMO wrote:
Sat Mar 16, 2019 11:36 am
AlohaJoe wrote:
Thu Mar 14, 2019 8:24 am
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am
Hi,

I'm curious if anyone knows an estimate for what fraction of insurance companies revenue goes to paying out claims? It might vary by what type of insurance, so if you have an estimate, please state which insurance product you know about.
Can't you just go read the annual financial report for any public insurance company?

In 2017 State Farm reported $42 billion in premiums earned and $32 billion in claims, $5 billion on expenses for paying claims, and $10 billion for service and administrative fees for a net underwriting LOSS of 4$ billion.

Throw in dividends to policyholders and 2017 was a clear winner for people who held insurance.
Makes me want to pay my insurers extra to help them get by. :happy

I suspect there's lots of fluff in those outgoing numbers. Also the CEO's seem to have been clear winners despite
apparent huge losses:

https://www.insurancebusinessmag.com/us ... 99975.aspx
What’s missing here is that in between collecting the premiums and paying the claims, the insurance company has this huge pile of money that they invest, often for years, before it’s needed to pay the claims. That’s how they can lose money on underwriting and still be profitable.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sun Mar 17, 2019 7:49 am
by simas
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am

(I don't want to this to derail the thread, but what I'm internally curious about is how much I am overpaying to mitigate the risk that insurance is meant to cover. I'm sure a portion of my premiums go to overhead, profit, regulatory expenses, etc. The question isn't really if I am overpaying, but by how much.)
Hello, your overall question is meaningless as you are trying to connect pooled summary level statistics vs individual "I am overpaying, but by how much" and it will never do so. the problem with sample of 1 is that the calculations become meaningless whenever you are the one who is actually benefiting from the pooled nature of insurance - i.e. how what is the 'overpay' in situations when you need those hundreds of thousands of dollars in attorney fees for preparation and defence, and/or settlement, and/or verdict money in millions in 'exchange' for you $600 annual insurance premium? how many centuries would it take for you to pay for it?

Few things about insurance (not talking about health insurance here which I do not know)
- it is about POOLED risk
- it is highly regulated (the rate you are paying on any specific insurance product is set by your state (in US) which is determining and approving the filling by insurance companies). Math rules the world.
- insurance is a long term business with pretty unique circumstances. you can pay now for coverage, cancel at anytime, and a claim against you may come anytime in the future (years for now) and may also take years/decade to resolve. insurance is setup and regulated such that company will defend you those years in the future with costs hundreds or thousands of times your premium as that is the nature of your contract with them. Insurance may 'drop' you (refuse to reissue the policy, etc.), however for that time you were covered, you will be supported/serviced/protected from here into the forever as that is how risk management pools work by law.


if you look at cost structure of insurance companies, the premiums written + investment returns are on the money coming in side. money leaving the pool is are attorney fees to support/defend you, any other (i.e. expert witnesses) fees, settlements, verdict payouts, admin expenses (this includes regulatory but also people to pick up the phone when you call and manage claim process). by individual client this is pretty meaningless

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sun Mar 17, 2019 8:04 am
by B4Xt3r
simas wrote:
Sun Mar 17, 2019 7:49 am
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am

(I don't want to this to derail the thread, but what I'm internally curious about is how much I am overpaying to mitigate the risk that insurance is meant to cover. I'm sure a portion of my premiums go to overhead, profit, regulatory expenses, etc. The question isn't really if I am overpaying, but by how much.)
Hello, your overall question is meaningless as you are trying to connect pooled summary level statistics vs individual "I am overpaying, but by how much" and it will never do so. the problem with sample of 1 is that the calculations become meaningless whenever you are the one who is actually benefiting from the pooled nature of insurance - i.e. how what is the 'overpay' in situations when you need those hundreds of thousands of dollars in attorney fees for preparation and defence, and/or settlement, and/or verdict money in millions in 'exchange' for you $600 annual insurance premium? how many centuries would it take for you to pay for it?

Few things about insurance (not talking about health insurance here which I do not know)
- it is about POOLED risk
- it is highly regulated (the rate you are paying on any specific insurance product is set by your state (in US) which is determining and approving the filling by insurance companies). Math rules the world.
- insurance is a long term business with pretty unique circumstances. you can pay now for coverage, cancel at anytime, and a claim against you may come anytime in the future (years for now) and may also take years/decade to resolve. insurance is setup and regulated such that company will defend you those years in the future with costs hundreds or thousands of times your premium as that is the nature of your contract with them. Insurance may 'drop' you (refuse to reissue the policy, etc.), however for that time you were covered, you will be supported/serviced/protected from here into the forever as that is how risk management pools work by law.


if you look at cost structure of insurance companies, the premiums written + investment returns are on the money coming in side. money leaving the pool is are attorney fees to support/defend you, any other (i.e. expert witnesses) fees, settlements, verdict payouts, admin expenses (this includes regulatory but also people to pick up the phone when you call and manage claim process). by individual client this is pretty meaningless
I put that comment in parenthesis, and with a disclaimer that I did not want it to derail the thread. Let's refrain from (for the time being) discussing that aspect.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sun Mar 17, 2019 8:08 am
by simas
B4Xt3r wrote:
Sun Mar 17, 2019 8:04 am

I put that comment in parenthesis, and with a disclaimer that I did not want it to derail the thread. Let's refrain from (for the time being) discussing that aspect.
I hear you. I think this is a major disunderstanding on how insurance works in general.

the answer to your question is that it is meaningless. you are not underpaying anything or overpaying anything since you have zero certainty of whether you will or not be the actual beneficiary of the pooled nature of insurance. same for your neighbor on the left, right, sideways. individually, it is meaningless.

Also, I am not sure what 'win' and 'lose' mean in this case. if I 'win' and get something for my premium, meaning I am hit with the claim, loss, issue, etc- doesn't this meant that I actually lost? and if I 'lose' and 'get nothing for my premium', doesn't it mean that I actually won? I offloaded the risk elsewhere , potentially very high cost risk, for very small percentage of potential loss. I do not mind 'losing' like this...

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sun Mar 17, 2019 8:26 am
by averagedude
Insurance companies have to be in a position to pay out large claims when catastrophe happens. Sometimes when this happens, it can put insurance companies out of business. This doesn't necessarily happen because they can't pay the claims, but a disastrous event could cause their ratings to go down, which can cause outflows from their business. Insurance isn't a high margin business like some industries. They usually range from 5% to 10%, which shows that they aren't as "greedy" as some think they are.

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sun Mar 17, 2019 8:34 am
by pshonore
averagedude wrote:
Sun Mar 17, 2019 8:26 am
Insurance companies have to be in a position to pay out large claims when catastrophe happens. Sometimes when this happens, it can put insurance companies out of business. This doesn't necessarily happen because they can't pay the claims, but a disastrous event could cause their ratings to go down, which can cause outflows from their business. Insurance isn't a high margin business like some industries. They usually range from 5% to 10%, which shows that they aren't as "greedy" as some think they are.
Thats one reason most companies purchase reinsurance for catastrophes and natural disasters and very large property risks. Of course they premiums they pay to reinsurors are just another expense they have to cover

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sun Mar 17, 2019 9:23 am
by pshonore
simas wrote:
Sun Mar 17, 2019 7:49 am
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am

(I don't want to this to derail the thread, but what I'm internally curious about is how much I am overpaying to mitigate the risk that insurance is meant to cover. I'm sure a portion of my premiums go to overhead, profit, regulatory expenses, etc. The question isn't really if I am overpaying, but by how much.)
Hello, your overall question is meaningless as you are trying to connect pooled summary level statistics vs individual "I am overpaying, but by how much" and it will never do so. the problem with sample of 1 is that the calculations become meaningless whenever you are the one who is actually benefiting from the pooled nature of insurance - i.e. how what is the 'overpay' in situations when you need those hundreds of thousands of dollars in attorney fees for preparation and defence, and/or settlement, and/or verdict money in millions in 'exchange' for you $600 annual insurance premium? how many centuries would it take for you to pay for it?

Few things about insurance (not talking about health insurance here which I do not know)
- it is about POOLED risk
- it is highly regulated (the rate you are paying on any specific insurance product is set by your state (in US) which is determining and approving the filling by insurance companies). Math rules the world.
- insurance is a long term business with pretty unique circumstances. you can pay now for coverage, cancel at anytime, and a claim against you may come anytime in the future (years for now) and may also take years/decade to resolve. insurance is setup and regulated such that company will defend you those years in the future with costs hundreds or thousands of times your premium as that is the nature of your contract with them. Insurance may 'drop' you (refuse to reissue the policy, etc.), however for that time you were covered, you will be supported/serviced/protected from here into the forever as that is how risk management pools work by law.


That was true at one time but now a lot of business liability policies are written on a "claims made" basis. Here's a link to explain the difference:
https://www.progressivecommercial.com/b ... ccurrence/

Re: Fraction of insurance companies revenue goes to paying out claims?

Posted: Sun Mar 17, 2019 11:47 am
by simas
pshonore wrote:
Sun Mar 17, 2019 9:23 am
simas wrote:
Sun Mar 17, 2019 7:49 am
B4Xt3r wrote:
Thu Mar 14, 2019 7:31 am

(I don't want to this to derail the thread, but what I'm internally curious about is how much I am overpaying to mitigate the risk that insurance is meant to cover. I'm sure a portion of my premiums go to overhead, profit, regulatory expenses, etc. The question isn't really if I am overpaying, but by how much.)
Hello, your overall question is meaningless as you are trying to connect pooled summary level statistics vs individual "I am overpaying, but by how much" and it will never do so. the problem with sample of 1 is that the calculations become meaningless whenever you are the one who is actually benefiting from the pooled nature of insurance - i.e. how what is the 'overpay' in situations when you need those hundreds of thousands of dollars in attorney fees for preparation and defence, and/or settlement, and/or verdict money in millions in 'exchange' for you $600 annual insurance premium? how many centuries would it take for you to pay for it?

Few things about insurance (not talking about health insurance here which I do not know)
- it is about POOLED risk
- it is highly regulated (the rate you are paying on any specific insurance product is set by your state (in US) which is determining and approving the filling by insurance companies). Math rules the world.
- insurance is a long term business with pretty unique circumstances. you can pay now for coverage, cancel at anytime, and a claim against you may come anytime in the future (years for now) and may also take years/decade to resolve. insurance is setup and regulated such that company will defend you those years in the future with costs hundreds or thousands of times your premium as that is the nature of your contract with them. Insurance may 'drop' you (refuse to reissue the policy, etc.), however for that time you were covered, you will be supported/serviced/protected from here into the forever as that is how risk management pools work by law.


That was true at one time but now a lot of business liability policies are written on a "claims made" basis. Here's a link to explain the difference:
https://www.progressivecommercial.com/b ... ccurrence/
Read and understand what you are buying. there is no free lunch... same truth in insurance (which is massive and has many different fields) as in any other area... no different than not getting UM/UIM coverage and then crying how come insurance company cheated you now you are facing tens of thousands of dollars of bills because you saved 150 every 6 months going with cheapest policy possible with fly by night outfit... you get what you pay for (which also means you do not get what you do not pay for).