4 ms·

> Assuming insurance companies are profitable, insurance is a -EV bet for the consumer. Not necessarily. Most insurers pretty much break even on the insurance,

by phonon 10y ago

> Assuming insurance companies are profitable, insurance is a -EV bet for the consumer. Not necessarily. Most insurers pretty much break even on the insurance, and make their money on investing the premiums. Auto in particular. > The only reason to ever buy insurance is if the potential loss would be ruinously large. Gaps in unemployment simply don't generate that kind of huge loss the way a house fire, extended illness or million-dollar lawsuit would. The loss doesn't have to be large in absolute terms. It's what the financial effects would be. If you lose your job and have no savings, and your expenses exceed your state unemployment benefits, what do you think will happen? Lose you home maybe, take a job you are not suited for, and lose a huge amount of your lifetime earnings? It's not the absolute amount, it's the timing. > According to numbers earlier in the article, this pays out $536.50 * 24, about 6.7 weeks of pretax wages or 12.9% of your annual income. That's for their example, it depends on several criteria. Go to the site and play with the quoter! > If you put 10% of your income into an emergency fund, you can build it to the level of the payout from this insurance in a little over a year. Sure. And how many people do that today? Ummmm....

true_religion 10y ago
> Sure. And how many people do that today? Ummmm.... Can you explain why you think people will act like rational actors and buy insurance rather than act like rational actors and save that same money in mutual fund for emergencies? I never understand arguments that boil down to "people' won't do X smart thing, they'll do Y smart thing because I support Y".
- rwmj 10y ago
  Sometimes people are forced to buy insurance. In the UK it is mandatory to have car insurance (else the police will literally take away and crush your car). My mortgage demands that I take out home insurance. And of course the state provides a kind of health and unemployment insurance which is mandatory for UK taxpayers. You aren't forced to have savings.
  - icebraining 10y ago
    You aren't forced onto this private unemployment insurance either, which was what was being replied to.
  - mseebach 10y ago
    In many (most?) jurisdictions you can post a bond for liability insurance. This is typically used by fleet managers etc, but is also available to HNW individuals. Essentially you prove to an insurer (by posting a bond) that you can and will pay for any third party damage you cause, and in return they give you a practically free (or cheap, super-high-deductible) policy.
    - rwmj 10y ago
      In the UK you can post a bond in lieu of having motor insurance, but it's something like £250,000 so rather out of the range of the ordinary car driver. (It's mainly used for commercial vehicle fleets as you say.)
- phonon 10y ago
  Sure. Because, at the rate you pay premiums, it would take somewhere between 8 and 20 years to save up the full coverage amount. So either a) You had to have started saving as early as possible, or b) You have to save a much larger percentage of your income to catch up Also, you might have rational purpose for not saving that much, so you can deploy your income in a more productive way. Similarly, why would people get a car loan? Just save up and pay cash!!!!! Why waste money on interest payments (particularly when interest rates on loans were much higher.) Some people could do that, some couldn't. Now you have an option you didn't have before.
justinhj 10y ago
> Not necessarily. Most insurers pretty much break even on the insurance, and make their money on investing the premiums. Auto in particular. That's surprising to me. I'm not familiar with the industry but logically I'd expect that if the company is breaking even that means that after operating costs they are paying out the rest the money in claims, so what's left to invest? If they're not just breaking even, and are building large cash deposits, surely they would be needed quickly in the event of a sudden burst of claims, so their investment options would have to be a lot of more liquid.
- phonon 10y ago
  >> Not necessarily. Most insurers pretty much break even on the insurance, and make their money on investing the premiums. Auto in particular. >That's surprising to me. I'm not familiar with the industry but logically I'd expect that if the company is breaking even that means that after operating costs they are paying out the rest the money in claims, so what's left to invest? Well, see http://www.insurancejournal.com/news/national/2015/08/10/377988.htm http://www.insurancejournal.com/news/national/2015/08/10/377... for example. GEICO had a 99%+ combined ratio. (Combined means it includes other expenses, not just claims). Claim payments would be about 2/3 of that, then costs relating to handling claims about half the remainder, then the rest more typical overhead. GEICO might also be able to get your car repaired cheaper than you could get it repaired if you self-insured as well. So yes, auto insurance is a good deal. That's a "good" year for a very healthy insurance company. if there is a big hurricane and thousands of cars get destroyed, they might have a combined ratio of 120% plus that year. They do try to get 6%+ investment returns on the premiums...which is basically their profits. >If they're not just breaking even, and are building large cash deposits, surely they would be needed quickly in the event of a sudden burst of claims, so their investment options would have to be a lot of more liquid. That why the State makes sure they are adequately reserved against loss, and/or reinsured properly.
- cosmie 10y ago
  Insurance is a business with a strong, predictable, and constant cash flow. People are paying premiums virtually every day of every month. Payouts are more sporadic. So you're able to invest and make money on those premiums until needed for payouts. But wait, you don't need to liquidate those investments to make your payout. Just don't invest your incoming cash flow, and pay out from that instead? Bigger blip than usual and not enough cash flow to handle outgoing expenditures? Borrow against your illiquid assets at fantastic rates because of your predictable cash flow and solid asset portfolio. Gives you enough runway to either pay that debt down with a longer timeframe of cash flow or to liquidate those assets, if servicing that debt is worse than your asset return. ^^ General thought process of insurance. Geico is special in trying to maintain a breakeven on premiums vs payouts and source all profit from investment income. But doing so allows them to have competitive premiums in most risk pools, amass a large amount of market share, and provide Berkshire Hathaway with enormous liquid assets to invest. Many insurance companies bake a target profit margin into their actuarial models, and derive profit from a mix of premiums and investments. But the higher your premiums, the lower your market share, and the less capital/leverage your investment arm has available. So it's a balancing act based on business priorities.

by phonon 10y ago

true_religion 10y ago

> Sure. And how many people do that today? Ummmm.... Can you explain why you think people will act like rational actors and buy insurance rather than act like rational actors and save that same money in mutual fund for emergencies? I never understand arguments that boil down to "people' won't do X smart thing, they'll do Y smart thing because I support Y".

rwmj 10y ago
Sometimes people are forced to buy insurance. In the UK it is mandatory to have car insurance (else the police will literally take away and crush your car). My mortgage demands that I take out home insurance. And of course the state provides a kind of health and unemployment insurance which is mandatory for UK taxpayers. You aren't forced to have savings.
- icebraining 10y ago
  You aren't forced onto this private unemployment insurance either, which was what was being replied to.
- mseebach 10y ago
  In many (most?) jurisdictions you can post a bond for liability insurance. This is typically used by fleet managers etc, but is also available to HNW individuals. Essentially you prove to an insurer (by posting a bond) that you can and will pay for any third party damage you cause, and in return they give you a practically free (or cheap, super-high-deductible) policy.
  - rwmj 10y ago
    In the UK you can post a bond in lieu of having motor insurance, but it's something like £250,000 so rather out of the range of the ordinary car driver. (It's mainly used for commercial vehicle fleets as you say.)
phonon 10y ago
Sure. Because, at the rate you pay premiums, it would take somewhere between 8 and 20 years to save up the full coverage amount. So either a) You had to have started saving as early as possible, or b) You have to save a much larger percentage of your income to catch up Also, you might have rational purpose for not saving that much, so you can deploy your income in a more productive way. Similarly, why would people get a car loan? Just save up and pay cash!!!!! Why waste money on interest payments (particularly when interest rates on loans were much higher.) Some people could do that, some couldn't. Now you have an option you didn't have before.

justinhj 10y ago

> Not necessarily. Most insurers pretty much break even on the insurance, and make their money on investing the premiums. Auto in particular. That's surprising to me. I'm not familiar with the industry but logically I'd expect that if the company is breaking even that means that after operating costs they are paying out the rest the money in claims, so what's left to invest? If they're not just breaking even, and are building large cash deposits, surely they would be needed quickly in the event of a sudden burst of claims, so their investment options would have to be a lot of more liquid.

phonon 10y ago
>> Not necessarily. Most insurers pretty much break even on the insurance, and make their money on investing the premiums. Auto in particular. >That's surprising to me. I'm not familiar with the industry but logically I'd expect that if the company is breaking even that means that after operating costs they are paying out the rest the money in claims, so what's left to invest? Well, see http://www.insurancejournal.com/news/national/2015/08/10/377988.htm http://www.insurancejournal.com/news/national/2015/08/10/377... for example. GEICO had a 99%+ combined ratio. (Combined means it includes other expenses, not just claims). Claim payments would be about 2/3 of that, then costs relating to handling claims about half the remainder, then the rest more typical overhead. GEICO might also be able to get your car repaired cheaper than you could get it repaired if you self-insured as well. So yes, auto insurance is a good deal. That's a "good" year for a very healthy insurance company. if there is a big hurricane and thousands of cars get destroyed, they might have a combined ratio of 120% plus that year. They do try to get 6%+ investment returns on the premiums...which is basically their profits. >If they're not just breaking even, and are building large cash deposits, surely they would be needed quickly in the event of a sudden burst of claims, so their investment options would have to be a lot of more liquid. That why the State makes sure they are adequately reserved against loss, and/or reinsured properly.
cosmie 10y ago
Insurance is a business with a strong, predictable, and constant cash flow. People are paying premiums virtually every day of every month. Payouts are more sporadic. So you're able to invest and make money on those premiums until needed for payouts. But wait, you don't need to liquidate those investments to make your payout. Just don't invest your incoming cash flow, and pay out from that instead? Bigger blip than usual and not enough cash flow to handle outgoing expenditures? Borrow against your illiquid assets at fantastic rates because of your predictable cash flow and solid asset portfolio. Gives you enough runway to either pay that debt down with a longer timeframe of cash flow or to liquidate those assets, if servicing that debt is worse than your asset return. ^^ General thought process of insurance. Geico is special in trying to maintain a breakeven on premiums vs payouts and source all profit from investment income. But doing so allows them to have competitive premiums in most risk pools, amass a large amount of market share, and provide Berkshire Hathaway with enormous liquid assets to invest. Many insurance companies bake a target profit margin into their actuarial models, and derive profit from a mix of premiums and investments. But the higher your premiums, the lower your market share, and the less capital/leverage your investment arm has available. So it's a balancing act based on business priorities.