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This is your friendly reminder that the insurance industry does not generally make money on underwriting. In other words they are losing money on insuring you.

This is your friendly reminder that the insurance industry does not generally make money on underwriting. In other words they are losing money on insuring you. Typically the costs of the insurance side of the business are greater than their revenue from premiums. This typically means that insurance actually is a good deal on net. They make their money on investing the float. They can only do that if they attract premium payers by having the most competitive pricing. They can only have competitive pricing by having accurate data and models. Allstate, for example, is billions of dollars in the hole on paying out claims for the past decade. Most insurance companies are. Edit: I'm talking about underwriting losses. Selling insurance and paying claims is a sort of loss leader for the insurance industry. Insurance companies are net losers on paying out claims, but they make enough back by investing the premiums before claims have to get paid, that it is still a net profitable business. Essentially insurance companies are loaned money by their customers since they are selling a promise of future payment on claims. They invest this pool of money and keep the gains until it is time to pay out on claims. Many companies (like allstate) pay out more in claims than they collect in premiums. For 2022 and 2023 they paid out 5 billion more in claims than they took in in premiums. Those were pretty bad years, but over the long run, just about every insurance company loses money this way. Look at their financial reports if you don't believe me: https://www.allstateinvestors.com/static-files/d61a8007-647a-47e4-91cd-0558d1c5a87a https://www.allstateinvestors.com/static-files/d61a8007-647a... Additional Edit: this comment is particular to the big property and casualty insurance products (home and car insurance on the consumer side). Best Buy extended warranties, health insurance, and other products may have business models that rhyme, but that don't follow this exact fact pattern.

eptcyka 2y ago
Can you provide some sources on this? Genuinely interested to learn more.
- dghlsakjg 2y ago
  Their financial reports have the numbers plain as day: https://www.allstateinvestors.com/static-files/d61a8007-647a-47e4-91cd-0558d1c5a87a https://www.allstateinvestors.com/static-files/d61a8007-647a... Page 2 has their premiums collected and their claims paid. They are down 5 billion in 2022 and 2023. Haven't seen the full results for 2024 yet. For an explanation of why, Warren Buffets letters to investors explain the insurance industry as a whole pretty well (page 7): https://www.berkshirehathaway.com/letters/2013ltr.pdf https://www.berkshirehathaway.com/letters/2013ltr.pdf Pretty consistently, the industry as a whole loses money on policies.
ceejayoz 2y ago
Allstate appears to have made a profit for ~14 of the last 15 years. https://www.macrotrends.net/stocks/charts/ALL/allstate/net-income https://www.macrotrends.net/stocks/charts/ALL/allstate/net-i...
- dghlsakjg 2y ago
  They make a profit on investing the float that offsets their underwriting loss. I never claimed that insurance companies aren't profitable. I said that their insurance is a money loser. If you look at their financial statements you can see that they have been losing billions on underwriting for years https://www.allstateinvestors.com/static-files/d61a8007-647a-47e4-91cd-0558d1c5a87a https://www.allstateinvestors.com/static-files/d61a8007-647a...
  - ceejayoz 2y ago
    But... they don't have money to invest without the insurance premiums coming in. My family finances look a lot worse if you exclude interest and investment proceeds at random from the analysis, too. $10-20B profit annually is not something I'd describe as "in the hole". The "hole" is overflowing with money.
    - dghlsakjg 2y ago
      If you keep selling a product for $95 that costs you $100 to deliver you will be "in the hole" on that product line. For Allstate, that product line is insurance. If you invest that $95, get a $15 dollar return, and then deliver the $100 product, you have made a net profit even though you sold the product for below cost. You are still in the hole for the insurance product no matter how you slice it. Yes, I get that the insurance product is what allows them to invest the float. But any accountant can tell you that they are in the hole on that product. They are still selling the product at a loss, even if their time arbitrage lets them make money elsewhere. Its kind of magic in that its a win/win scenario in what looks like a zero sum game. The point is that people think that insurance companies make money off of them paying a premium higher than what they will recover in claims, and saying that insurance is always a bad deal for the consumer. My point is that isn't true. Insurance companies pay out more in underwriting costs than they collect in premiums. Insurance is very frequently and insanely good deal in aggregate.
caminante 2y ago
Generally agree about InsuranceCos, but I don't think your claim is true about profitability of core insurance operations. Their combined ratios (insurance payouts + expenses / premiums collected) are closely tracked by investors and if they're creeping up to 100% without a systemic reason that affects all InsuranceCos, they get a lot of scrutiny. Here's just one lens [0] for home insurance going back to 2004 (~20 years). It appears that the combined ratios were under 100% for ~8 years. [0] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-homeowners-insurers-net-combined-ratio-surges-past-110-81711947 https://www.spglobal.com/marketintelligence/en/news-insights...
- s1artibartfast 2y ago
  did you mean [(insurance payouts + expenses) / premiums collected] ?
  - caminante 2y ago
    Sure. I don't think people get tripped up on the OoO in context.
    - s1artibartfast 2y ago
      no worries, not trying to be pedantic, just wading into new territory with a lot of questions. Sometimes financial equations take unintuitive forms for niche use cases.
- dghlsakjg 2y ago
  > Here's just one lens [0] for home insurance going back to 2004 (~20 years). It appears that the combined ratios were under 100% for ~8 years. For the other 12 years they were over. 60% of the years were losses. The average is 101.535 for all years in your source. So over 20 years their costs were $101.53 for every $100 in premiums collected. I didn't say that they ALWAYS post losses, I said that it is very common, and that insurance premiums are a net money loser for the industry. This is just another source proving that out, unless I'm missing something?
s1artibartfast 2y ago
Fascinating. Thanks for sharing this.
potato3732842 2y ago
The insurer losing money insuring your does not mean it's a good deal on net. I pay $100, they pay out $90 on my behalf in that time period, total cost to them is $110 because overhead. That it cost them $110 and I only paid $100 doesn't mean I'm not losing $10. Of course they actually make $111 because they invested my money but that's beside the point.

eptcyka 2y ago

Can you provide some sources on this? Genuinely interested to learn more.

dghlsakjg 2y ago
Their financial reports have the numbers plain as day: https://www.allstateinvestors.com/static-files/d61a8007-647a-47e4-91cd-0558d1c5a87a https://www.allstateinvestors.com/static-files/d61a8007-647a... Page 2 has their premiums collected and their claims paid. They are down 5 billion in 2022 and 2023. Haven't seen the full results for 2024 yet. For an explanation of why, Warren Buffets letters to investors explain the insurance industry as a whole pretty well (page 7): https://www.berkshirehathaway.com/letters/2013ltr.pdf https://www.berkshirehathaway.com/letters/2013ltr.pdf Pretty consistently, the industry as a whole loses money on policies.

ceejayoz 2y ago

Allstate appears to have made a profit for ~14 of the last 15 years. https://www.macrotrends.net/stocks/charts/ALL/allstate/net-income https://www.macrotrends.net/stocks/charts/ALL/allstate/net-i...

dghlsakjg 2y ago
They make a profit on investing the float that offsets their underwriting loss. I never claimed that insurance companies aren't profitable. I said that their insurance is a money loser. If you look at their financial statements you can see that they have been losing billions on underwriting for years https://www.allstateinvestors.com/static-files/d61a8007-647a-47e4-91cd-0558d1c5a87a https://www.allstateinvestors.com/static-files/d61a8007-647a...
- ceejayoz 2y ago
  But... they don't have money to invest without the insurance premiums coming in. My family finances look a lot worse if you exclude interest and investment proceeds at random from the analysis, too. $10-20B profit annually is not something I'd describe as "in the hole". The "hole" is overflowing with money.
  - dghlsakjg 2y ago
    If you keep selling a product for $95 that costs you $100 to deliver you will be "in the hole" on that product line. For Allstate, that product line is insurance. If you invest that $95, get a $15 dollar return, and then deliver the $100 product, you have made a net profit even though you sold the product for below cost. You are still in the hole for the insurance product no matter how you slice it. Yes, I get that the insurance product is what allows them to invest the float. But any accountant can tell you that they are in the hole on that product. They are still selling the product at a loss, even if their time arbitrage lets them make money elsewhere. Its kind of magic in that its a win/win scenario in what looks like a zero sum game. The point is that people think that insurance companies make money off of them paying a premium higher than what they will recover in claims, and saying that insurance is always a bad deal for the consumer. My point is that isn't true. Insurance companies pay out more in underwriting costs than they collect in premiums. Insurance is very frequently and insanely good deal in aggregate.

caminante 2y ago

Generally agree about InsuranceCos, but I don't think your claim is true about profitability of core insurance operations. Their combined ratios (insurance payouts + expenses / premiums collected) are closely tracked by investors and if they're creeping up to 100% without a systemic reason that affects all InsuranceCos, they get a lot of scrutiny. Here's just one lens [0] for home insurance going back to 2004 (~20 years). It appears that the combined ratios were under 100% for ~8 years. [0] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-homeowners-insurers-net-combined-ratio-surges-past-110-81711947 https://www.spglobal.com/marketintelligence/en/news-insights...

s1artibartfast 2y ago
did you mean [(insurance payouts + expenses) / premiums collected] ?
- caminante 2y ago
  Sure. I don't think people get tripped up on the OoO in context.
  - s1artibartfast 2y ago
    no worries, not trying to be pedantic, just wading into new territory with a lot of questions. Sometimes financial equations take unintuitive forms for niche use cases.
dghlsakjg 2y ago
> Here's just one lens [0] for home insurance going back to 2004 (~20 years). It appears that the combined ratios were under 100% for ~8 years. For the other 12 years they were over. 60% of the years were losses. The average is 101.535 for all years in your source. So over 20 years their costs were $101.53 for every $100 in premiums collected. I didn't say that they ALWAYS post losses, I said that it is very common, and that insurance premiums are a net money loser for the industry. This is just another source proving that out, unless I'm missing something?

s1artibartfast 2y ago

Fascinating. Thanks for sharing this.

potato3732842 2y ago

The insurer losing money insuring your does not mean it's a good deal on net. I pay $100, they pay out $90 on my behalf in that time period, total cost to them is $110 because overhead. That it cost them $110 and I only paid $100 doesn't mean I'm not losing $10. Of course they actually make $111 because they invested my money but that's beside the point.