answer a question

[Kuciwalker]

premise 1: the timespan of an insurer that undercharges defaulting is long compared to the timespan of consumers switching providers
premise 2: consumers are incapable (or unwilling) of estimating the default risk of their provider
conclusion: the equilibrium state of the insurance market is one where insurers universally undercharge and regularly default

Are my premises incorrect?
If not, is my conclusion actually true?
If not, why?

[Hauldren Collider]

My thoughts:
1. Insurers can undercharge certain customers and overcharge other customers. The ones that overcharge risky customers lose the risky customers, increasing their profitability, and the ones that undercharge risky customers default.
2. Customers don't switch easily or frequently and won't switch on a dime because the price is slightly lower, thus we don't get a price reduction spiral.
3. Insurance companies actually have insurance themselves.
4. Legislation?

[Kuciwalker]

Note: I'm seeking answers from people who actually know them, i.e. probably not you

1. Insurers can undercharge certain customers and overcharge other customers. The ones that overcharge risky customers lose the risky customers, increasing their profitability, and the ones that undercharge risky customers default.

No insurer wants to undercharge anyone, by definition. Undercharge != charge less for one thing than another, undercharge = charge less than the expected claims + price of risk.

2. Customers don't switch easily or frequently and won't switch on a dime because the price is slightly lower, thus we don't get a price reduction spiral.

Evidence please.

Insurance companies actually have insurance themselves.

An insurance company could save money and lower its premiums by forgoing that insurance.

Also, turtles all the way down, though premise 2 is less plausible in the reinsurance market.

4. Legislation?

Yes, that is a possible answer.

[Hauldren Collider]

2. Customers don't switch easily or frequently and won't switch on a dime because the price is slightly lower, thus we don't get a price reduction spiral.

Evidence please.

...do you have evidence for either of your premises?

As for evidence, I would say, why the hell does geico need so many ****ing commercials if it isn't true

[Kuciwalker]

According to my dad the answer is [essentially] a regulatory ceiling on default risk.

...do you have evidence for either of your premises?

Evidence for 1 is that I don't hear about insurance companies going bankrupt very often.

Evidence for 2 is that I personally have no idea what the default risk on e.g. my car insurance is.

Obviously, neither piece of evidence is especially strong, which is why I asked whether my premises were true.

[Al B. Sure!]

yay! Brother debate!

Really, Kuci, is this what you do now? Post boring insurance topics?

[Al B. Sure!]

An insurance company could save money and lower its premiums by forgoing that insurance.

I would like to point out (yay rememberings from Risk Management and Insurance classes!) that typically regulations limiting the issuance of policies to a ratio of insurer net worth force insurers to re-insure, as they can only issue additional policies if they re-insure. And since, obviously, economies of scale and a larger, more diversified portfolio are factors here, it's in the best interest of insurers to re-insure.

[Al B. Sure!]

Also, don't forget what is done with the float... that's why you don't see bankrupt insurance companies even if the first part of your conclusion would be true. They're pulling in returns on their investments.

[Dauphin]

Are you ignoring false and fraudulent claims, or counting it as a part of risk?

[Al B. Sure!]

Are you ignoring false and fraudulent claims, or counting it as a part of risk?

I doubt there are enough false and fraudulent claims to really affect insurance companies as a whole. Could be wrong though but I doubt it.

EDIT: Whoah there.

According to industry studies, the annual cost of insurance fraud is between $85 and $120 billion, and is growing at a rate of 10% per year.

still not sure if it even matters for Kuci's question.

I don't know the statistics but I estimate that most insurance company revenue comes from investments. Premiums may not even cover insurance claims but premiums + investments more than cover them. So no defaulting even in cases of undercharging customers

[Dauphin]

Fraud is massive in every sector. It's more a question of how much you find acceptable rather that the absolute value.

[Kuciwalker]

Are you ignoring false and fraudulent claims, or counting it as a part of risk?

Was this directed at me? If so, yes, I'm not distinguishing that sort of thing.

[Cort Haus]

This is actually the most boring thread ever. wd the pair of you :golfclapping:

[Al B. Sure!]

pair of you? 4 people posted in this thread.

So, Kuci, any thoughts or are you just dismissing everything I said because I just have a pathetic Finance degree from a public university?

[Asher]

This is actually the most boring thread ever. wd the pair of you :golfclapping:

Glad it's not just me.