8 ms·

It's worth mentioning some states have caps on how much insurance can make, in other words if they're not absorbing a base amount of risk, they have to give the

by surge 7y ago

It's worth mentioning some states have caps on how much insurance can make, in other words if they're not absorbing a base amount of risk, they have to give the money back because people are paying too much to insure against something where the risk is low. I've gotten checks back from auto insurance before where they made too much money that year due to lack of payouts.

chrisseaton 7y ago
Ah that explains it. Otherwise doesn't a refund go against the whole idea of insurance? The idea is you pay a premium not knowing if you'll need it or not, and they take on all the risk if you do need it. If you ask for your premium back because you didn't need it you're missing the point of insurance.
- ceejayoz 7y ago
  Brand loyalty is a thing, too, though. "Allstate did me a solid when they didn't have to" is a pretty good PR move, especially if they're suddenly awash in cash due to reduced claims.
  - harikb 7y ago
    If it was just PR, companies will spend $10 on ads talking about it for every $1 they give away. Give credit to the regulation when it works - next time someone says regulation is bad.. remember this.
    - AnthonyMouse 7y ago
      For a mutual insurance company, what difference does the regulation make? Whether the customers get the money as a refund check or the mutual insurance dividend or lower premiums next period, they still get it. Even for a for-profit insurer, insurance is a fairly competitive market. They might have to give the customers the money anyway to keep them from defecting to the mutual insurance companies. Even if they didn't, that would make being in the insurance market more profitable, which would attract new competitors, which would drive down premiums/margins until the risk-adjusted return of becoming an insurance carrier was back where it was. In other words, in a competitive market the customer gets the money one way or another. This is a common occurrence with regulation. The regulation requires some good thing that would have happened regardless, the good thing happens and the proponents credit the regulation even though it was inevitable. Meanwhile you have a compliance cost, because it takes resources to keep track of the regulation and make sure you're complying with it even if it was the exact thing you were going to do anyway. That makes everyone poorer -- the compliance cost is the opposite of the windfall, so it makes it less attractive to compete in the insurance market and allows companies to pass on the compliance costs as higher premiums.
      - harikb 7y ago
        You are making two claims 1. If there is extra profit one year, these companies will willingly reduce premiums instead of giving bonuses, stock buy backs, or dividends to investors. I don’t know if you have observed the stock market recently 2. “Compliance cost” - these things are not done via paper and fax machines. Regulation simply asks one to keep track of, say in the case of medical companies, administration cost vs servicing cost etc - things you would have had to do anyways in your public-good-seeking scenario above
        AnthonyMouse 7y ago
        > 1. If there is extra profit one year, these companies will willingly reduce premiums instead of giving bonuses, stock buy backs, or dividends to investors. I don’t know if you have observed the stock market recently It's the thing competitive markets require of them. If costs go down, one company is going to notice how much more profit they can make by lowering prices and using the lower prices to triple their market share. The others then have to do the same thing or they continue to lose market share. The buybacks are something else entirely -- they're a result of low long-term interest rates. Companies have at least two ways of raising capital. They can sell stock and they can borrow money. When interest rates are low it makes more sense to raise money through borrowing than selling shares. Buybacks are the reverse of selling shares, so when interest rates are reduced there is a rebalancing which involves companies borrowing more money and buying back shares because it's cheaper to use borrowed capital than invested capital when interest rates are low. > 2. “Compliance cost” - these things are not done via paper and fax machines. Regulation simply asks one to keep track of, say in the case of medical companies, administration cost vs servicing cost etc - things you would have had to do anyways in your public-good-seeking scenario above Have you seen the regulations in some of these industries? There is nothing simple about it. It requires you to have lawyers in addition to accountants. And the lawyers are pathologically risk-averse but have plenary control over compliance policy because no one wants to end up in court, so the rules in practice are characteristically much more rigid than what the legislature intended. Many of the costs are also fixed rather than proportional to customer volume, which disproportionately impacts smaller companies and results in a disproportionately large negative impact on competition.
    - coredog64 7y ago
      The next time someone said water boarding is bad, remember when you were thirsty and had a cold glass of ice water.
- analog31 7y ago
  Car insurance is more than just insurance, though. For one thing, it's mandatory. A person with zero assets buying insurance is also missing the point of liability insurance, but they have to buy it anyway.
  - deleted 7y ago
    [deleted]
  - hermitdev 7y ago
    Not in every US state. I think compulsory liability insurance is only required in 48/50 states.
  - bluGill 7y ago
    The point of mandatory liability insurance is to ensure you have enough assets to pay for any damage you cause.
- perl4ever 7y ago
  Do you think that the price an insurance company sets for risk in advance is by definition correct? I mean, something that comes to mind in terms of current events, people selling puts (stock options) just before the stuff hit the fan with COVID-19, were selling insurance. It seems really difficult in my mind to argue that that insurance was priced correctly just before the panic started.
  - gwright 7y ago
    > Do you think that the price an insurance company sets for risk in advance is by definition correct? The question doesn't make sense. The price is neither correct nor incorrect, it is just the price. It may or may not lead to financial success based on a whole host of factors but that isn't the same thing as "correct" or "incorrect".
  - imtringued 7y ago
    The insurance company can also just reduce the billed amount.
- dllthomas 7y ago
  There's a difference between "you didn't need it" and "an unusually small portion of the (large) risk pool needed it".
- AnthonyMouse 7y ago
  > The idea is you pay a premium not knowing if you'll need it or not, and they take on all the risk if you do need it. It's not getting your premium back because you didn't need it. You'd still get back this portion of the premium even if you get into a car accident on your way to the grocery store, because it's not about you, it's about everybody else. The average risk went down, so the average premium went down. This certainly happens in the other direction too, they'll raise your premium for the next period if the average risk goes up. But their marketing departments aren't stupid. Sending everybody a check right now makes their "largess" more conspicuous to customers than sending everybody a smaller bill next quarter. It also keeps you from canceling your policy with them and switching to someone else currently offering a lower rate because of the currently lower risk.
  - unbalancedevh 7y ago
    I just got a refund check from Progressive, the same time I got my next bill. I wish they had just reduced the bill.
    - Spivak 7y ago
      I can’t even imagine how annoying a system like that would be to implement. So you credit everyone’s account but then you have mark this money as special to ensure that it eventually gets paid out to every account in either credit or cash. Then you have to monitor the accounts for policy cancellations and issue checks.
      - djannzjkzxn 7y ago
        The credit card companies don’t seem to have any trouble applying my cash back rewards to my account balance without sending me a check. But if I do cancel my account and end up with a positive balance, they do send a check. Seems like basic accounting to me, not some sort of wizardry like you suggest. Mailing checks is probably more expensive if anything.
- triceratops 7y ago
  The premium is calculated based on a certain set of risk factors. Miles driven is one of them. If that changes, it's reasonable to ask for a refund.
xxpor 7y ago
Do you know of a list of these states somewhere? And what the rates are?
briandear 7y ago
There is more nuance. It’s actually because an insurance company is required to pay a certain percentage of premiums out for claims. In health insurance, there is the “80/20” rule where at least 80% of premiums are required to be paid as claims. Auto/property has similar rules set by relevant state insurance commissions. If claim volume drops, they means they don’t get to necessarily keep the extra “profit.” I am not familiar with the rules around auto (I used to be a disaster home/property claims adjuster,) but I suspect auto rules are similar. It isn’t about risk being reduced, but more about claims payouts being projected less than the premium rates have accounted for. Insurance companies actually want lower rates — it means they sell more insurance which further deepens the risk pool.
taneq 7y ago
This sounds like a great system on face value, but it also adds a perverse incentive for insurers to drive up repair costs (and hence their premiums) in order to increase their own revenue. I've heard this effect put forward as one reason that the U.S. medical system's prices are so overinflated.
- triceratops 7y ago
  Fortunately (afaik) there are no in/out of network auto mechanics, and the mechanics don't negotiate rates with the companies (again afaik). The barriers to setting up an auto repair shop are also far lower than setting up a hospital.
  - sturgill 7y ago
    Also there is less concern with an auto “death panel” where cost of repair exceeds replacement value. I can’t imagine Aetna offering you $50k to just die already...
    - clarry 7y ago
      Someone bumped my rear last year and their insurance company had me take the car to a body shop.. to be re-painted. I don't know what final cost was but I heard an estimate that put it at roughly the value of a new bumper. Of course buying a new bumper and installing it would be a much quicker & simpler job than sanding and painting an old bumper (this is Honda btw, replacement bumpers come pre-painted), but it wouldn't allow the body shop to make as much profit.
      - triceratops 7y ago
        If the final price of repairing the bumper was the same (or nearly same) as buying and installing a new bumper, why do you say the former has a higher profit margin? Surely it's more profitable to spend fewer hours and earn the same revenue - as they would do by installing a new bumper?
deusexepsilon 7y ago
The other states have caps on a whole range of insurance. There's also some states that have cap on insurance premiums that is only effective in case of collapse, a "loss," or a "cost," because they're insurance companies who cannot keep things in place that can be taken care of. That's also a good policy way for some people to buy insurance in the individual market, but that can still be expensive. The idea that you can keep things in place to save money, or in this case an extended-run plan as well, is a lie. It's not. I would say that what we would do would fall on the taxpayers side by the way — not even if they had the flexibility to keep things in place but to continue servicing the insurance, keeping insurance in place until the company would be bankrupt in the event of a collapse.

by surge 7y ago

chrisseaton 7y ago

Ah that explains it. Otherwise doesn't a refund go against the whole idea of insurance? The idea is you pay a premium not knowing if you'll need it or not, and they take on all the risk if you do need it. If you ask for your premium back because you didn't need it you're missing the point of insurance.

ceejayoz 7y ago
Brand loyalty is a thing, too, though. "Allstate did me a solid when they didn't have to" is a pretty good PR move, especially if they're suddenly awash in cash due to reduced claims.
- harikb 7y ago
  If it was just PR, companies will spend $10 on ads talking about it for every $1 they give away. Give credit to the regulation when it works - next time someone says regulation is bad.. remember this.
  - AnthonyMouse 7y ago
    For a mutual insurance company, what difference does the regulation make? Whether the customers get the money as a refund check or the mutual insurance dividend or lower premiums next period, they still get it. Even for a for-profit insurer, insurance is a fairly competitive market. They might have to give the customers the money anyway to keep them from defecting to the mutual insurance companies. Even if they didn't, that would make being in the insurance market more profitable, which would attract new competitors, which would drive down premiums/margins until the risk-adjusted return of becoming an insurance carrier was back where it was. In other words, in a competitive market the customer gets the money one way or another. This is a common occurrence with regulation. The regulation requires some good thing that would have happened regardless, the good thing happens and the proponents credit the regulation even though it was inevitable. Meanwhile you have a compliance cost, because it takes resources to keep track of the regulation and make sure you're complying with it even if it was the exact thing you were going to do anyway. That makes everyone poorer -- the compliance cost is the opposite of the windfall, so it makes it less attractive to compete in the insurance market and allows companies to pass on the compliance costs as higher premiums.
    - harikb 7y ago
      You are making two claims 1. If there is extra profit one year, these companies will willingly reduce premiums instead of giving bonuses, stock buy backs, or dividends to investors. I don’t know if you have observed the stock market recently 2. “Compliance cost” - these things are not done via paper and fax machines. Regulation simply asks one to keep track of, say in the case of medical companies, administration cost vs servicing cost etc - things you would have had to do anyways in your public-good-seeking scenario above
      - AnthonyMouse 7y ago
        > 1. If there is extra profit one year, these companies will willingly reduce premiums instead of giving bonuses, stock buy backs, or dividends to investors. I don’t know if you have observed the stock market recently It's the thing competitive markets require of them. If costs go down, one company is going to notice how much more profit they can make by lowering prices and using the lower prices to triple their market share. The others then have to do the same thing or they continue to lose market share. The buybacks are something else entirely -- they're a result of low long-term interest rates. Companies have at least two ways of raising capital. They can sell stock and they can borrow money. When interest rates are low it makes more sense to raise money through borrowing than selling shares. Buybacks are the reverse of selling shares, so when interest rates are reduced there is a rebalancing which involves companies borrowing more money and buying back shares because it's cheaper to use borrowed capital than invested capital when interest rates are low. > 2. “Compliance cost” - these things are not done via paper and fax machines. Regulation simply asks one to keep track of, say in the case of medical companies, administration cost vs servicing cost etc - things you would have had to do anyways in your public-good-seeking scenario above Have you seen the regulations in some of these industries? There is nothing simple about it. It requires you to have lawyers in addition to accountants. And the lawyers are pathologically risk-averse but have plenary control over compliance policy because no one wants to end up in court, so the rules in practice are characteristically much more rigid than what the legislature intended. Many of the costs are also fixed rather than proportional to customer volume, which disproportionately impacts smaller companies and results in a disproportionately large negative impact on competition.
  - coredog64 7y ago
    The next time someone said water boarding is bad, remember when you were thirsty and had a cold glass of ice water.
analog31 7y ago
Car insurance is more than just insurance, though. For one thing, it's mandatory. A person with zero assets buying insurance is also missing the point of liability insurance, but they have to buy it anyway.
- deleted 7y ago
  [deleted]
- hermitdev 7y ago
  Not in every US state. I think compulsory liability insurance is only required in 48/50 states.
- bluGill 7y ago
  The point of mandatory liability insurance is to ensure you have enough assets to pay for any damage you cause.
perl4ever 7y ago
Do you think that the price an insurance company sets for risk in advance is by definition correct? I mean, something that comes to mind in terms of current events, people selling puts (stock options) just before the stuff hit the fan with COVID-19, were selling insurance. It seems really difficult in my mind to argue that that insurance was priced correctly just before the panic started.
- gwright 7y ago
  > Do you think that the price an insurance company sets for risk in advance is by definition correct? The question doesn't make sense. The price is neither correct nor incorrect, it is just the price. It may or may not lead to financial success based on a whole host of factors but that isn't the same thing as "correct" or "incorrect".
- imtringued 7y ago
  The insurance company can also just reduce the billed amount.
dllthomas 7y ago
There's a difference between "you didn't need it" and "an unusually small portion of the (large) risk pool needed it".
AnthonyMouse 7y ago
> The idea is you pay a premium not knowing if you'll need it or not, and they take on all the risk if you do need it. It's not getting your premium back because you didn't need it. You'd still get back this portion of the premium even if you get into a car accident on your way to the grocery store, because it's not about you, it's about everybody else. The average risk went down, so the average premium went down. This certainly happens in the other direction too, they'll raise your premium for the next period if the average risk goes up. But their marketing departments aren't stupid. Sending everybody a check right now makes their "largess" more conspicuous to customers than sending everybody a smaller bill next quarter. It also keeps you from canceling your policy with them and switching to someone else currently offering a lower rate because of the currently lower risk.
- unbalancedevh 7y ago
  I just got a refund check from Progressive, the same time I got my next bill. I wish they had just reduced the bill.
  - Spivak 7y ago
    I can’t even imagine how annoying a system like that would be to implement. So you credit everyone’s account but then you have mark this money as special to ensure that it eventually gets paid out to every account in either credit or cash. Then you have to monitor the accounts for policy cancellations and issue checks.
    - djannzjkzxn 7y ago
      The credit card companies don’t seem to have any trouble applying my cash back rewards to my account balance without sending me a check. But if I do cancel my account and end up with a positive balance, they do send a check. Seems like basic accounting to me, not some sort of wizardry like you suggest. Mailing checks is probably more expensive if anything.
triceratops 7y ago
The premium is calculated based on a certain set of risk factors. Miles driven is one of them. If that changes, it's reasonable to ask for a refund.

xxpor 7y ago

Do you know of a list of these states somewhere? And what the rates are?

briandear 7y ago

There is more nuance. It’s actually because an insurance company is required to pay a certain percentage of premiums out for claims. In health insurance, there is the “80/20” rule where at least 80% of premiums are required to be paid as claims. Auto/property has similar rules set by relevant state insurance commissions. If claim volume drops, they means they don’t get to necessarily keep the extra “profit.” I am not familiar with the rules around auto (I used to be a disaster home/property claims adjuster,) but I suspect auto rules are similar. It isn’t about risk being reduced, but more about claims payouts being projected less than the premium rates have accounted for. Insurance companies actually want lower rates — it means they sell more insurance which further deepens the risk pool.

taneq 7y ago

This sounds like a great system on face value, but it also adds a perverse incentive for insurers to drive up repair costs (and hence their premiums) in order to increase their own revenue. I've heard this effect put forward as one reason that the U.S. medical system's prices are so overinflated.

triceratops 7y ago
Fortunately (afaik) there are no in/out of network auto mechanics, and the mechanics don't negotiate rates with the companies (again afaik). The barriers to setting up an auto repair shop are also far lower than setting up a hospital.
- sturgill 7y ago
  Also there is less concern with an auto “death panel” where cost of repair exceeds replacement value. I can’t imagine Aetna offering you $50k to just die already...
  - clarry 7y ago
    Someone bumped my rear last year and their insurance company had me take the car to a body shop.. to be re-painted. I don't know what final cost was but I heard an estimate that put it at roughly the value of a new bumper. Of course buying a new bumper and installing it would be a much quicker & simpler job than sanding and painting an old bumper (this is Honda btw, replacement bumpers come pre-painted), but it wouldn't allow the body shop to make as much profit.
    - triceratops 7y ago
      If the final price of repairing the bumper was the same (or nearly same) as buying and installing a new bumper, why do you say the former has a higher profit margin? Surely it's more profitable to spend fewer hours and earn the same revenue - as they would do by installing a new bumper?

deusexepsilon 7y ago

The other states have caps on a whole range of insurance. There's also some states that have cap on insurance premiums that is only effective in case of collapse, a "loss," or a "cost," because they're insurance companies who cannot keep things in place that can be taken care of. That's also a good policy way for some people to buy insurance in the individual market, but that can still be expensive. The idea that you can keep things in place to save money, or in this case an extended-run plan as well, is a lie. It's not. I would say that what we would do would fall on the taxpayers side by the way — not even if they had the flexibility to keep things in place but to continue servicing the insurance, keeping insurance in place until the company would be bankrupt in the event of a collapse.