Originally posted by: Gooberlx2
Originally posted by: Cuda1447
Disgruntled, a question. How does it take an insurance company 3 years to start making money? Maybe I'm a bit ignorant but what type of upfront costs do you have that make it cost 3 years worth of premiums to make a dime?
I'm guessing it's not upfront costs (like paperwork or processing), but it's catching up with claims from other people. The statement comes from the larger perspective.
That is looking at the policies as a whole. All a customer sees is the agency up front. Behind the scenes there is a lot more going on. I'll give you a simple walk through of the various costs.
Edit: Uppsala9496 gave the basic reason why, and basically nailed it. If you want some other aspects keep reading.
Before the policy is even started:
First is the actual agent and their staff. Some insurance companies agents are paid by the company, others are their own business they run. Either way the company has to pay the agency for their managment of the policy. An agents book of business is all the policies they "own" or manage. We pay them on a commision basis for their work.
Secondly the policy gets sent to underwriting for review. My company it takes two paths (as with most), either it is automatically accepted by the system (as it meets requirements) or it isn't accepted by the system and it gets reviewed by an underwriter. If it is automatically accepted, the money spent in the equipment and R&D on the algorithms used is part of the cost. If we review the policy there is even more cost, because an employee gets paid for that in addition to all the equipment they need.
Once it gets accepted:
We have to manage that policy. If an insured wants to change their deductibles, add/remove a vehicle/driver, change coverages, etc every time that happens that costs us money. Policies reguluarly get 2-3 updates/changes every 6 months. Once again the agent gets paid for the policy, if the insured called into the 800 number that employee gets paid, if the change has to get reviewed that costs money, etc.
The amount of captial it costs to manage a policy costs money, factor in to that fact we must remain solvant and like banks hold a portion of the insured asset money in cash. We do invest money, and that is a big part where insurance companies are able to soak up multi-million/billion dollar losses from natural disasters.
It's just like any other service offered, that you only see the front end (or in this case don't even get any tangible benefit like most services). That statistic is also taken from all the policies we insure on average it takes 2-3 years to start to make money on it. I'm not saying that every policy is like that, because it's not. Some policies make money sooner, but that is rare.
If we insure 1000 policies that are average $500/half, and have 10% have losses (a low figure) in the first year and average $5,000 then that means we took in $1,000,000 and paid out $500,000. Factor in the agency costs, employee and capital costs, the costs of claims (remember just because a claim is $5,000 we spend much more then that in the handleing of the claim), accounting, advertising (which insurance companies do a lot of), etc. That $250,000 paid out, cost us more in the realm of $650,000+ from just the claim itself before any other expenses like capital are considered. I am using lowish figures to keep it simple, it shouldn't be too hard to see how one year of those policies cost us over the million we took in from premiums. Once again 10% loss rate is really low (for most lines of insurance), and it's generally a lot higher then that (depends on the the type of insurance and other factors though).
I don't remember the exact study that was done (it was about a year and 1/2 ago I saw it), but if you were more interested I could most likely dig up some information about it.
Facebook
Twitter