3 ms·

I 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

I 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 ago
  Shouldn'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 ago
    You can certainly expect it short to medium term yes. Longer term I don't think so.
fny 9y ago
I 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
sbarre 9y ago
I think your example is overly simplistic, but I understand what you're saying... To stay at that level, I would say that while there's nothing inherently bad about #2 it would be better if 75% remained to pay claims, and then they would not only offer lower premiums but better coverage. And as someone else said, this isn't about morals, it's about priorities.. An insurance company should exist primarily to protect it's customers. That said, if investors were contractually bound to accept only a fixed return over a period of time (almost like a bond or a GIC or something?) and had no voting power or influence in the direction of the company, that could work? My issue is less about "investors" and more about focus and priorities I suppose..
- bradleyjg 9y ago
  I once read an interesting story about the host* business. Apparently the dominant player is a for-profit business. The competition is convents around the country that have traditionally supplied them to parish churches. Here you have organizations that are as non-profit as they come -- convents aren't like many hospitals where the CEO and other high level employees are raking off a huge salaries as quasi-profit. And the motives and priorities couldn't be any purer, their work is essentially in the service of what they consider the glorification of God. Yet they are being out-competed by a for-profit company that explicitly tries to make on every sale in order to compensate the owners. How do you explain this if you view profit as deadweight loss that can only be at the expense of customers? Edit: https://www.vice.com/en_us/article/vvaeyb/the-surprisingly-cutthroat-business-of-communion-crackers https://www.vice.com/en_us/article/vvaeyb/the-surprisingly-c... *The bread that is used during Catholic masses.
  - sbarre 9y ago
    So first off, you're adding additional meaning to my statements by saying things like "you view profit as deadweight loss", which is not what I said at all (or if that's what you understood, then my apologies). Secondly, I don't really think I need to disprove your anecdotal scenarios (which aren't really apples to apples anyways) in order to stand behind my statements.. I will say this: I did originally say that executives and employees should be well-compensated and that the company, while not profit-driven, should still be making enough money to attract top talent and be competitive in the market. My idea was never about running an insurance company like a charity or a tiny unsophisticated business (as in your host example), it was just about not prioritizing shareholder profits over the core business service provided to the customer (i.e. providing coverage and paying claims), which is what many publicly-traded insurance companies do today.

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 ago
Shouldn'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 ago
  You can certainly expect it short to medium term yes. Longer term I don't think so.

fny 9y ago

I 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

sbarre 9y ago

I think your example is overly simplistic, but I understand what you're saying... To stay at that level, I would say that while there's nothing inherently bad about #2 it would be better if 75% remained to pay claims, and then they would not only offer lower premiums but better coverage. And as someone else said, this isn't about morals, it's about priorities.. An insurance company should exist primarily to protect it's customers. That said, if investors were contractually bound to accept only a fixed return over a period of time (almost like a bond or a GIC or something?) and had no voting power or influence in the direction of the company, that could work? My issue is less about "investors" and more about focus and priorities I suppose..

bradleyjg 9y ago
I once read an interesting story about the host* business. Apparently the dominant player is a for-profit business. The competition is convents around the country that have traditionally supplied them to parish churches. Here you have organizations that are as non-profit as they come -- convents aren't like many hospitals where the CEO and other high level employees are raking off a huge salaries as quasi-profit. And the motives and priorities couldn't be any purer, their work is essentially in the service of what they consider the glorification of God. Yet they are being out-competed by a for-profit company that explicitly tries to make on every sale in order to compensate the owners. How do you explain this if you view profit as deadweight loss that can only be at the expense of customers? Edit: https://www.vice.com/en_us/article/vvaeyb/the-surprisingly-cutthroat-business-of-communion-crackers https://www.vice.com/en_us/article/vvaeyb/the-surprisingly-c... *The bread that is used during Catholic masses.
- sbarre 9y ago
  So first off, you're adding additional meaning to my statements by saying things like "you view profit as deadweight loss", which is not what I said at all (or if that's what you understood, then my apologies). Secondly, I don't really think I need to disprove your anecdotal scenarios (which aren't really apples to apples anyways) in order to stand behind my statements.. I will say this: I did originally say that executives and employees should be well-compensated and that the company, while not profit-driven, should still be making enough money to attract top talent and be competitive in the market. My idea was never about running an insurance company like a charity or a tiny unsophisticated business (as in your host example), it was just about not prioritizing shareholder profits over the core business service provided to the customer (i.e. providing coverage and paying claims), which is what many publicly-traded insurance companies do today.