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Yes risk is attributed to premiums. Yet I talked to an employee at a large US insurance firm and he said they take a loss with premiums. All the premiums do i
by larrydag 6y ago
Yes risk is attributed to premiums. Yet I talked to an employee at a large US insurance firm and he said they take a loss with premiums. All the premiums do is go into marketing and advertising. They make their money by investing. So basically insurance firms are hedge funds with cash flow.
- yold__ 6y agoI think you misinterpreted what was said. A company taking an underwriting loss like that would be shut down by regulators in a heartbeat. There are very large regulatory capital requirements in life insurance, which is why you don't see new entrants into the market.
- tfehring 6y agoI'd interpret "they take a loss with premiums" in the parent comment as meaning the nominal value of expected claims exceeds the nominal value of premium. And that's very commonly the case for interest-sensitive life and annuities. It's equivalent to the expected IRR from the policyholder's perspective being greater than 0, and it would be hard to justify selling an investment-oriented product with a negative expected return. Or consider a SPIA with a return of premium guarantee. The total claim payments will always be greater than or equal to premium on a nominal basis, so investment income necessarily funds over 100% of the profit.
- koheripbal 6y agoI'm dubious about that claim. There are laws that require capital-cash requirements to cover claims. Maybe they put their premiums into "almost-cash" securities, but I doubt they are gambling with the money. It's possible they are buying other derivatives to reduce their risk - or maybe other types of CDO's, etc... But if you're suggesting they are stock-picking with premiums - I find that very very hard to believe. ...and it's likely illegal.