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Suppose you are an insurer. You model the risk for your insurance product (suppose it's car insurance) and realize you need to charge $100/mo to make money afte
by Invictus0 3y ago
Suppose you are an insurer. You model the risk for your insurance product (suppose it's car insurance) and realize you need to charge $100/mo to make money after paying out all the claims. However, you have a competitor that is bad at modeling risk. They are charging $50/mo for their car insurance, and customers are flocking to them. Should you attempt to stay in this market? If you lower your prices, you will eventually get knocked out; if you keep them high, you will not get any customers.
Alternatively, suppose cars become super risky and you need to charge $10,000 a month to insure the car, and reasonably conclude that no one is going to pay that, and after you pay for marketing and overhead and payroll, you will still lose money if you try to sell the insurance product. Do you stay in the market?
It's especially funny to see everyone in the comments complaining that the insurance company is "only thinking about the short term".
- hypeit 3y ago> after you pay for marketing There should be no marketing if it's mandated. These companies should not be run for profit since having insurance is required by law in many situations.
- Invictus0 3y ago[flagged]
- whalesalad 3y agoYou’re describing socialism and we are operating in a capitalist society. I’m not advocating for or against but it’s naive to make these claims about how this should just be pure, devoid of evil and provided by the state. This debate will go on until the end of days.
- hypeit 3y agoI am describing a socialistic policy, which I think private but mandatory for-profit insurance makes a great case for. We already have government controls in place, if we lived in a "capitalist society", there would be no such thing as a health insurance mandate. We live in a hybrid world designed for regulatory capture and corruption, with our required payments flowing straight to executives and shareholders instead of actually providing a public good.
- Manuel_D 3y agoStay in the market because the competitor will be put out of business once their customers actually start filing claims. Then customers come back to you.
- pc86 3y agoThis only works if you can stay profitable enough long enough for it to start to happen. The fewer customers you have, the riskier your pool, and the higher your prices have to be. Suddenly $100 becomes $125 becomes $150 for the same or less profit. It's safer to just get out of the market entirely. You can always go back in but if you stay in too long it could wipe you out entirely.
- Manuel_D 3y agoIf all your customers are flocking to the undercharging competitor, you're out of the market anyway and your costs are effectively zero since you don't have anyone filing claims. There's no practical scenario where the competitor, which is losing money on each customer in aggregate, lasts longer than a company with no customers.
- sokoloff 3y agoPicking up nickels in front of a steamroller can appear profitable for a shockingly long time, as the traders using the "I'll just naked short VXX for easy money!" periodically find out.
- Invictus0 3y ago"costs are zero" Payroll? Overhead? Marketing? Rent? This isn't a thought exercise, there are real costs associated with being in a certain business.
- Manuel_D 3y agoAll of which the competitor also has to pay, on top of losing money on each customer.