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>I don’t care how cheap the policy is, I’m assuming they’re charging more than they payout on average. How would an insurance company stay in business if it we

>I don’t care how cheap the policy is, I’m assuming they’re charging more than they payout on average. How would an insurance company stay in business if it were any other way?

maxerickson 8y ago
They make money investing the float (the money they have received but not yet paid out).
seanlinehan 8y ago
Insurance companies make money by investing the premiums. It's possible for an insurance company to make a profit from investment even if they had unprofitable underwriting. From Warren Buffet: > Insurers receive premiums upfront and pay claims later. ... This collect-now, pay-later model leaves us holding large sums -- money we call "float" -- that will eventually go to others. Meanwhile, we get to invest this float for Berkshire's benefit. ... > If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that adds to the investment income produced from the float. This combination allows us to enjoy the use of free money -- and, better yet, get paid for holding it. Alas, the hope of this happy result attracts intense competition, so vigorous in most years as to cause the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Usually this cost is fairly low, but in some catastrophe-ridden years the cost from underwriting losses more than eats up the income derived from use of float. ...
- lotsofpulp 8y ago
  That’s just saying the nominal premiums are less than what they pay out, but the real value of premiums including expected return on investment is more than the losses paid out (obviously since the insurance company is in business). This real value is available to everyone since nowadays everyone can invest like the insurance companies with index funds, so comparing the real value of the premiums paid by the policyholder when the insurance company has to pay out is an accurate comparison.
  - maxerickson 8y ago
    That's a fine point, but the question was probably asked in the context of the nominal values.
    - lotsofpulp 8y ago
      It doesn’t seem useful to me to talk about nominal values when discussing value of money over long periods of time. The original comment was that insurance charges more than they payout, which was disputed saying they make up for it in investment earnings. What I’m saying is that since the same investment earnings are available to the premium payer, it is true that the insurance company charges more than they pay out, hence the original poster is right in avoiding insurance whenever they can (i.e. they can afford to pay for a loss they might have been planning on purchasing insurance for). All they need to do is invest it in one of the many nearly free index funds, and they’re in the same boat as the insurance company, but without having to pay for the salaries of the insurance company’s employees.
NeedMoreTea 8y ago
There's also a huge reinsurance market that insurers use to mitigate local risk, and arbitrage. It's how they can survive during the exceptional cases like a major flood where everyone is claiming.
Waterluvian 8y ago
I don't understand this for dental insurance in Canada. The premium I paid while a student was a fraction of a single visit. I visited twice a year and had additional work done some years.
- brewdad 8y ago
  My best guess would be that it's cheaper to pay extra towards your routine appointments and catch problems early versus waiting until you need major work done down the road due to neglecting your dental health.
  - Scoundreller 8y ago
    But this is student coverage: the expensive problems tend to: 1) come along later 2) not be wel reimbursed (eg: 60%), so if it can wait, many will until they have employment and better coverage.

>I don’t care how cheap the policy is, I’m assuming they’re charging more than they payout on average. How would an insurance company stay in business if it were any other way?

maxerickson 8y ago

They make money investing the float (the money they have received but not yet paid out).

seanlinehan 8y ago

Insurance companies make money by investing the premiums. It's possible for an insurance company to make a profit from investment even if they had unprofitable underwriting. From Warren Buffet: > Insurers receive premiums upfront and pay claims later. ... This collect-now, pay-later model leaves us holding large sums -- money we call "float" -- that will eventually go to others. Meanwhile, we get to invest this float for Berkshire's benefit. ... > If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that adds to the investment income produced from the float. This combination allows us to enjoy the use of free money -- and, better yet, get paid for holding it. Alas, the hope of this happy result attracts intense competition, so vigorous in most years as to cause the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Usually this cost is fairly low, but in some catastrophe-ridden years the cost from underwriting losses more than eats up the income derived from use of float. ...

lotsofpulp 8y ago
That’s just saying the nominal premiums are less than what they pay out, but the real value of premiums including expected return on investment is more than the losses paid out (obviously since the insurance company is in business). This real value is available to everyone since nowadays everyone can invest like the insurance companies with index funds, so comparing the real value of the premiums paid by the policyholder when the insurance company has to pay out is an accurate comparison.
- maxerickson 8y ago
  That's a fine point, but the question was probably asked in the context of the nominal values.
  - lotsofpulp 8y ago
    It doesn’t seem useful to me to talk about nominal values when discussing value of money over long periods of time. The original comment was that insurance charges more than they payout, which was disputed saying they make up for it in investment earnings. What I’m saying is that since the same investment earnings are available to the premium payer, it is true that the insurance company charges more than they pay out, hence the original poster is right in avoiding insurance whenever they can (i.e. they can afford to pay for a loss they might have been planning on purchasing insurance for). All they need to do is invest it in one of the many nearly free index funds, and they’re in the same boat as the insurance company, but without having to pay for the salaries of the insurance company’s employees.

NeedMoreTea 8y ago

There's also a huge reinsurance market that insurers use to mitigate local risk, and arbitrage. It's how they can survive during the exceptional cases like a major flood where everyone is claiming.

Waterluvian 8y ago

I don't understand this for dental insurance in Canada. The premium I paid while a student was a fraction of a single visit. I visited twice a year and had additional work done some years.

brewdad 8y ago
My best guess would be that it's cheaper to pay extra towards your routine appointments and catch problems early versus waiting until you need major work done down the road due to neglecting your dental health.
- Scoundreller 8y ago
  But this is student coverage: the expensive problems tend to: 1) come along later 2) not be wel reimbursed (eg: 60%), so if it can wait, many will until they have employment and better coverage.