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> After paying for broker commissions, fronting costs, reinsurance, customer service, claims processing, there’s often around 50% of the original premium dollar
by sbarre 9y ago
> After paying for broker commissions, fronting costs, reinsurance, customer service, claims processing, there’s often around 50% of the original premium dollar left to pay claims – which is the primary purpose of an insurance company.
What about shareholders? One of the biggest problem I have with insurance companies as for-profit enterprises is the inherent conflict of interest that comes from trying to service claims and customers as best as possible and turning a profit for shareholders.
I've always felt that insurance companies should be run as not-for-profits, or at the very least co-ops..
Don't get me wrong here, still pay the employees and the executives competitively (you want things to run efficiently and by talented teams so you need to attract top talent), but otherwise the whole enterprise should be working hard to make sure every other dollar goes to helping the customers who pay the premiums, and that's it.
- kilroy123 9y agoI feel like this is the case for a lot of big industries in the US. Insurance, especially health insurance. Personal banking with credit unions. Maybe even pharmaceutical companies.
- grok2 9y agoAren't car-insurances sort of co-op's? Atleast I've read verbiage in my California car insurance policy from Farmer's that indicates that the insurance policy is really owned by the pool of users taking insurance and Farmer's is just a manager taking a government controlled percentage for their operating costs + profit.
- akharris 9y agoIn your case, that's true. Farmers is a reciprocal, meaning that the policyholders own it. Not all car insurance companies work this way.
- occamrazor 9y agoI believe that Farmers is owned by Zurich Insurance.
- akharris 9y agoThat's one of the hardest questions to answer. In order to generate profits for shareholders the carriers have to generate return on their float. That was "easy" during the big bull market that started in the 80s, but has become increasingly difficult. There are a number of very large and successful mutual insurance companies - take a look at USAA. They also happen to enjoy some of the highest customer satisfaction ratings in all of financial services.
- secabeen 9y agoUSAA is still affected by many of the same forces that affect for-profit insurers. USAA has changed a lot in the last 20 years as they've opened up to more members.
- Symmetry 9y agoIs generating enough income to give a profit to investors so different from generating enough income to meet operating expenses. Even without investors, if I was working at an insurance operation I'd feel a conflict between trying to be good to customers and trying to keep the lights on.
- pjc50 9y agoA lot of life insurance companies (e.g. the Prudential) started as mutuals. In the UK in the 90s there was a wave of "demutualisation" where the customers decided they'd take a one-off payment in return for handing control over to shareholders.
- kgwgk 9y agoI don't know if it was done similarly in every case in every country, but my experience is that the customers became shareholders (with an option to sell the shares immediately, which I guess almost everyone exercised).
- nwah1 9y agoCame here to say this. Probably most of the insurance companies were mutuals prior to demutualization. Probably the biggest consumer-owned business we have today would be Vanguard, when it comes to investment funds, but for a variety of reasons most industries have shifted to the corporate model.
- r0m4n0 9y agoIn CA there is heavy competition between not-for-profits and for-profit. Kaiser and Blue Shield are both not-for-profits. I'm not sure why you would pick a for-profit here given those options
- inferiorhuman 9y agoBlue Shield of California lost their tax-exempt status in California a few years back.
- r0m4n0 9y agoThey lost their ca tax exempt not for profit status but they are still not for profit... which means they pay normal taxes and still operate as a non profit, which is actually pretty amazing in my opinion. They also limit net income to 2% of revenue and refund anything more. https://www.blueshieldca.com/bsca/bsc/public/member/mp/contentpages/!ut/p/a1/tZExb8IwFIT_ShkYI784IXZGQ4ESlSJBq5IskW0MuErsEEzV_vs6lKFLQR3qyZbO7757hwq0RoXh73rHnbaGV927SEpMZ_QBIMwWgAEYhVH2lKaUEoJeUYEKaVzj9iivVS1UW0prnDKuVKYPl_tda63rAxf25EpRnVR53GtVbTpB29iWO1Vqs7VtfXbuw1YbbqTm1bEzaKTeoBwnIYmVgIBscBjEGEiQChkH6UClXCohtqHwxLknhl8Og1uBsrPgyn9vgNv5aL7zWNztgw4brRsrv3fxc_r0eRQBm45ZNKEvEY3ji-DK9NzjkzKjkMyGC3iEFSXA7sfLIZtgDNMQrf64j-xWYJ9Hvx0OBfM9dmV9OLT-nyKbuqbRZ1CIZEkhGlQ71ut9ATPHhq0!/dl5/d5/L2dBISEvZ0FBIS9nQSEh/ https://www.blueshieldca.com/bsca/bsc/public/member/mp/conte...
- inferiorhuman 9y agoHow is that still a thing? The LA Times article mentioned that they've never had status with the IRS and that they lost status with the California taxmen.
- iamnotlarry 9y agoAh. "Not-for-profit." Yeah. Right. How many millions do the execs get in salary? Those are costs, not profits, right? edit: typos
- d_e_solomon 9y ago
- bradleyjg 9y agoI guess I don't really see your point. Suppose we take two situations: #1 As described in the article, between the premium and the actual claims pool there's 50% lost to all the entities involved -- from brokers up through reinsurance companies and back down to the entity that actually cuts the claim check. But further suppose that all these companies happen to be co-ops and so no dollars are lost to passive investors. #2 There's a vertically integrated insurance company that is highly efficient. It only sells directly and doesn't use commissioned salespeople. It has overhead of only 25% and pays a 10% of revenue dividend to its shareholders, leaving 65% of premiums to pay claims. This enables the company to offer lower premiums for the same coverage. Is #1 somehow morally superior to #2? Do you think it is impossible for #2 to exist?
- weaksauce 9y ago> Do you think it is impossible for #2 to exist? not the OP but, in the long term, yes, I do believe a for profit entity is at odds with that. Shareholders clamor for more profit and will not be content with no growth.
- bradleyjg 9y agoShouldn't we expect plenty of revenue growth since the efficiency edge over competitors means they can charge lower prices? 10% of a growing revenue stream looks like a recipe for pretty happy shareholders.
- weaksauce 9y agoYou can certainly expect it short to medium term yes. Longer term I don't think so.
- fny 9y agoI think Sebastian is introducing an orthogonal perspective, which has nothing to do with morals. The theoretical ideal is that an insurance company nets zero profit while operating at maximal efficiency. Introducing a third-party (investors) that benefit from extracting revenue is a form of overhead that decreases that potential efficiency. This isn't all bad though. Likely, if it were not for the investors, the company would never exist, so they should have rights to a piece of the pie. Unfortunately, the trade-off introduced is conflict of interest. Investors reward behaviors that maximize revenues be it through cost-cutting, premium hikes, or benefit reductions (or potentially the opposite assuming sales increase enough.) Granted, some of the more negative actions might cause customers to move from one provider to the next because of free markets and whatnot, and theoretically, the market should reward the company that provides the best balance for customers... except that almost all insurance companies are owned by investors, and over the long run, these investors incentivized to maximize revenue in prisoner's-dilemma-like fashion.[0] So... I'd argue introducing investors over the short term is a fantastic idea, but at some point, it's probably wisest give them a heap of profits, and turn off the tap. Otherwise, the company will turn into yet another publicly-traded monstrosity with a mechanical conscience. [0]: https://en.wikipedia.org/wiki/Tacit_collusion https://en.wikipedia.org/wiki/Tacit_collusion
- Mz 9y agoSomething this article did not cover and which is often overlooked is that insurance companies invest the premiums they receive in order to help defray the cost of claims. Companies that are both talented and ethical will get a good rate of return on the investments, thus serving as good stewards for the money. I am not a fan of general health insurance. I think the government should provide universal basic health care and there should be health insurance for emergencies and the like. I don't think it matters so much whether it is a for profit business or a not-for-profit or a co-op. It will basically come down to: Are they actually ethical? Are they actually talented at what they do? Is the model of policy any good? Those will be problems regardless of the form of the organization. (Background: I worked for a big insurance company for over 5 years. As an employee there, I was sent by my employer to a local technical college to get training to do my entry level job. At least while there, this training entitled me to the spiffy title of "Certified Life and Health Insurance Specialist.")
- snarf21 9y agoThis is one of biggest misnomers when we talk about health insurance. We buy life insurance but don't plan to die once a month. We buy car insurance but don't plan to crash once a month. We buy health insurance and although we don't plan to go to the ER once a month, we may plan on seeing a primary care physician once a month whether for a chronic condition or maintenance or mental health or... Insurance is intended for unexpected things not expected things. I think the way to fix this is similar to what you said. Primary care should be provided for everyone and the way you drive that cost down is by using more PAs, CRNP/other nurses and having only one actual Dr. for oversight and tougher cases. There are huge system costs that can be removed just by focusing on things like treatment compliance, pre-habilitation, healthy lifestyle, good mental health, etc.
- derekp7 9y agoImagine if you paid for gas by using your auto insurance card? And also used insurance to cover normal car maintenance such as brakes, tires and oil changes. Now the co-pay on a tank of gas would be about 40 bucks, and if you tried to buy gas without insurance it would cost a couple thousand to fill the tank. But the insurance companies get a discount, and only end up paying 5 dollars per tank.
- sharemywin 9y agoInsurance companies used to run as mutual companies. Part of insurance is investing all that money. A lot of mutual companies become pseudo public companies so they could access cheap capital then grow faster. Of course once nationwide grew as big as they did they went private.
- omalleyt 9y agoIn a for-profit company, there's a group of people at the top who are paid handsomely for cutting costs (i.e. stock-based compensation). This doesn't exist in NGO's, and so for large organizations with lots of cash flow, bloat balloons exponentially (because the default, human loyalty of an employer is to their employees, not their customer)
- DomreiRoam 9y agoNGO are trying to cut cost down. They tray to focus to their mission as efficient that they can. Doctor without Border is faster in some case than public emergency service. The difference is that what is seen as cost, private company often see the product they deliver as a cost.
- asmithmd1 9y agoLemonade is a NYC based insurance start-up that is doing this idea but one better. They are building two halves of the business: a for-benefit corporation that is the insurance carrier, and a for-profit, broker side that takes a flat 10% commission on premiums. They are getting great traction in the few states where they currently sell insurance https://www.lemonade.com/blog/its-not-our-money/ https://www.lemonade.com/blog/its-not-our-money/
- zerni 9y agoThere are alternatives.. we are setting up an insurer with a new business model in the UK. We earn a flat fee every time we settle a claim for members of our community - they provide the funds to cover for each other. No conflict of interest, fair pricing, everything instant. Have a look. insureathing.com
- ascorbic 9y agoInteresting, but the variable premium scares me. Is there no limit on liability? What happens if lots of people claim in the same month?
- zerni 9y agoIf there are outliers and the premium would skyrocket we cap your premium at market rate through an agreement with a reinsurer. It's a standard financial tool insurers are using as well and costs us next to nothing.
- kalleboo 9y agoMy home insurance in Sweden was a co-op, and they'd pay back any profit they ended up making as a refund https://en.m.wikipedia.org/wiki/Länsförsäkringar https://en.m.wikipedia.org/wiki/Länsförsäkringar
- skrebbel 9y agoIs there a practical difference in cost though? A Dutch insurer (Univé) used to do the same, but in practice there turned out to be no significant different in total amount of money spent by customers. Even though they gave their profit back to their customers at the end of the year, they couldn't compete on price.
- the_mitsuhiko 9y ago> Is there a practical difference in cost though? There has to be since no shareholders are involved assuming the rest of the setup is the same. If they are not cheaper then it's more likely that the coop is badly run which sadly is not uncommon.
- pbhjpbhj 9y agoThere's at least one other alternative. The NFP uses the excess to pay better wages across the board. Thus benefiting every community those wages are spent in, which will usually be local (both to the business and it's clients). Monies move toward local, low cost and essential spending as opposed to remote, high cost and luxury spending that one would expect to dominate with dividends paid out by for profit businesses.
- kungtotte 9y agoI live in Sweden too, and Länsförsäkringar weren't cheaper than the alternatives for the things I looked at (car insurance, home insurance). That's just looking at the premiums though, there's no way to see any potential refunds and take those into account.
- 9y ago
- js8 9y agoI think in insurance, there should be two separate pools of money, one for the insurance fund itself, and the other for managing the fund (management of the risk model) and making profits for the owners of the insurance company. These should be separate items on your insurance bill, and no money should ever cross the line from one pool to another.