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how do insurnace companies make money??

A

Accipiter22

Banned
ok, so say you pay 100 dollars per week for your family's health care. so that's 5200 per year. Now say you break a leg or something...that's probably like 10,000 in costs. Then say your kid needs braces, that's another few grand...etc..etc....honestly how do insurance companies make money. You or your family have even one minor accident over even a 5 year span and they're ******.
 
Only a relatively small percentage of people need procedures that are really expensive. Plus the insurance companies never pay standard hospital fees.
 
Originally posted by: Heisenberg
Only a relatively small percentage of people need procedures that are really expensive. Plus the insurance companies never pay standard hospital fees.
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Nail on the head.
 
Running an insurance company is basically gambling, but it's heavily stacked in their favor.

Paying for insurance is also gambling. You're paying money to cover the odds that you might get hurt. Unlike gambling of course, if you don't play, the consequences can be dire.
 
Originally posted by: Accipiter22
ok, so say you pay 100 dollars per week for your family's health care. so that's 5200 per year. Now say you break a leg or something...that's probably like 10,000 in costs. Then say your kid needs braces, that's another few grand...etc..etc....honestly how do insurance companies make money. You or your family have even one minor accident over even a 5 year span and they're ******.
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Braces aren't covered by most insurance policies.
 
That $10000. bill (that you'd have to pay if you weren't insured) probably coste the insurance company $3500, and you stilll have to pay your co-pay/deductible. Insurance companies have negotiated HUGE discounts, often more than 50%.
Insurance is just legalized 9and often mandatory) gambling. You bet your money against theirs that you're a. gonna get sick, b. gonna have a car accident, or c. die. They make money by gambling that you're not...or not yet anyway...They take the premiums you pay, and invest it in stocks & bonds, and USUALLY make tons on your money...Quite a racket if you think about it...😉
 
It's exactly like a casino: the house always has the edge. Sometimes they lose money to the guy who comes in with $100 and walks out with $10k from playing blackjack. Over the long run, though, the odds are slanted in their favor and they break just above even.

Insurance companies are the same way. You break a leg and incur $10k in costs, but 200 other people don't have any health problems.

Your $100/wk is $5200/year...after you broke your leg and cost them $10k, they're $4800 in the hole. Let's say there are thirty other people on your health plan...even if most of them burn the full $5200 in medical costs, they only need ten people to come in at $480 less than that to break even.



I pay $45/mo for my health insurance, for which my employer kicks in about another $200/mo. That comes out to $245/mo, or $2940/year. I get sick about once every two years, and I go for a yearly physical...that's three doctor visits ($80/each billed to my insurance after co-pay) every two years, or 1.5 doctor visits a year ($180). On top of that, I'm accident prone, so I generally make two ER visits each year, with at least one requiring X-rays. Just seeing the ER doctor costs a little more than a PCP visit (~$100, after copay), and x-rays are billed to insurance at around $300. We're now up to $680 in medical costs that I've used in a year, after paying nearly $3000 in premiums. That's a profit to the insurance company of $2260.

I was diagnosed with cancer a year and a half ago. Surgery (~$8000), diagnostic work ($900) and chemo ($45,000) add up to about $53k in expenses to my insurance company over two years. They only need 12 people over the same time frame who did not get cancer and use the same amount of medical care that I usually do to break even.

My company covers several hundred employees under my plan. The insurer has over a million customers.

It's all about spreading the risk around. I might have used far more in medical services than I paid into the plan over the past two years, but there are many more who used less to make up for it. It's not a guessing game; insurance companies of all types analyze data and determine their risks and set rates that guarantee house odds.
 
And besides lowballing the payouts, what do you think they're doing with all our premiums? Certainly not just stuffing them in a mattress waiting for a claim. Insurance companies are probably the largest institutional investor in the stock market. So, while they get claims to pay, they are earning interest on their investments.....when you invest billions, you get huge returns.

Then there is the ploy of stalling the payoffs to whoever the payee is.......they have to review, re-review, deny, have you refile, etc., etc.

Insurance companies are some of the most profitable entities out there, oil companies excepted.
 
I was told from an employee at one of the largest insurance companies that premiums cover around 97% of the payouts. The real profit margins came from trading. The insurances companies probably have some of the largest collective liquid reserves around.
 
Plus insurance companies invest your money. Insurance companies have so much money to play around with that they are able to buy enormous amounts of properties, stocks, etc which equates to an enormous amount of profit.
 
Originally posted by: reitz
It's exactly like a casino: the house always has the edge. Sometimes they lose money to the guy who comes in with $100 and walks out with $10k from playing blackjack. Over the long run, though, the odds are slanted in their favor and they break just above even.
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No, not really. Just about any successful casino will rake in so much dough they wont know what to do with it.
 
Originally posted by: herbiehancock
And besides lowballing the payouts, what do you think they're doing with all our premiums? Certainly not just stuffing them in a mattress waiting for a claim. Insurance companies are probably the largest institutional investor in the stock market. So, while they get claims to pay, they are earning interest on their investments.....when you invest billions, you get huge returns.

Then there is the ploy of stalling the payoffs to whoever the payee is.......they have to review, re-review, deny, have you refile, etc., etc.

Insurance companies are some of the most profitable entities out there, oil companies excepted.
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LOL at $100 billion in Ed Liddy's mattress.
 
I keep paying in to auto insurance because the law requires me to do so. I keep paying into health insurance because my job requires me to do so. I've never had a claim on either. So, over the last ten years or so, that means they've pocketed about $12,500 just from my premiums. Multiply that by a few million -those of us who can drive and take care of our health - and that's pure profit. These people outnumber the people with chronic health problems and bad drivers (though it's hard to see that driving around St. Louis nowadays).
 
Originally posted by: LegendKiller
Who ever says insurance companies and insurance is just gambling has the logic capabilities of a sand flea.
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Depending on how broadly you define "gambling", it can certainly fall under that category.

They use statistics to estimate how many claims they expect each year and how much they will cost. Then they set premiums based on that -- and if they are wrong, they lose money (for instance, a number of home insurers took a beating during Hurricane Andrew, because premiums were relatively low and they paid out tens of billions in claims.) It's the same sort of 'gambling' that a casino owner does, except that you can't calculate the exact odds in advance.
 
they make money on the float. They invest it while they wait for you to have an accident. Every type of insurance operates a little differently - so therefore makes money in slightly different ways.

And no, insurance companies are very far from being the largest institutional investor....we have these things called banks that have almost everyones money.
 
Originally posted by: Matthias99
Originally posted by: LegendKiller
Who ever says insurance companies and insurance is just gambling has the logic capabilities of a sand flea.
Click to expand...

Depending on how broadly you define "gambling", it can certainly fall under that category.

They use statistics to estimate how many claims they expect each year and how much they will cost. Then they set premiums based on that -- and if they are wrong, they lose money (for instance, a number of home insurers took a beating during Hurricane Andrew, because premiums were relatively low and they paid out tens of billions in claims.) It's the same sort of 'gambling' that a casino owner does, except that you can't calculate the exact odds in advance.
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Insurance companies operate on many different levels, all of which is equates to the transferral and distribution of risk. This is the same thing as buying stock options, futures, forward, or any other methodology of hedging risk. You pay somebody to take your risk from you, it is a calculated knowledge of elimination, or at least mitigation, of risk. One could say that risk is nothing but gambling. However, gambling (on the gamblers side) is seeking risk, not mitigating it. Even if you don't take insurance you aren't seeking risk.

The risk-averse person will take insurance to mitigate their risk. Those who accept it demand a premium to take your risk. They then take that risk, calculate many assumptions of payout, and either keep that risk or write it to others. Gambling is uncalculated risk, insurance is not. Insurance companies take your money and purchase fixed income investments that match the cashflows of their calculated risk with moderate return. This "duration matching" or other hedging activities allow them to largely neutralize various fluctuations in risk assumptions.

Insurance company risk can be mitigated through many different ways. As I mentioned before cash-flow matching is one. Another is reinsurance (GenRe, SwissRe..etc). Other means would be something like a credit-default swap (Event X triggers a payment of $Y). Other investors calculate how much these risks would cost to assume and charge that premium.

Insurance companies make an appropriate risk-adjusted return for their companies, nothing egregious, but appropriate. The distribution of risk, whether through associated insurance policy holders, through the capital markets, or with private parties are all backed by thousands of man-hours of actuarial calculations. They cannot predict the future, but the market as a whole can price it, gauge the risk, and react appropriately.

Thus, insurance is not gambling. At least not in comparison to the Vegas type gambling.
 
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