Originally posted by Al B. Sure!
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Originally posted by Kuciwalker View PostNothing you said was relevant to my question.
Insurance companies don't default even if they regularly undercharged customers because their revenues are derived primarily from investments, not premiums.
I was also interested in your defense of this remark:
An insurance company could save money and lower its premiums by forgoing that insurance.Last edited by Al B. Sure!; July 17, 2010, 02:14."Flutie was better than Kelly, Elway, Esiason and Cunningham." - Ben Kenobi
"I have nothing against Wilson, but he's nowhere near the same calibre of QB as Flutie. Flutie threw for 5k+ yards in the CFL." -Ben Kenobi
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Originally posted by Al B. Sure! View PostI doubt there are enough false and fraudulent claims to really affect insurance companies as a whole. Could be wrong though but I doubt it.
The genesis of the "evil Finn" concept- Evil, evil Finland
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Insurance companies don't default even if they regularly undercharged customers because their revenues are derived primarily from investments, not premiums.
No, insurance companies don't default because they face extraordinarily tight regulations and [at least in the United States] are compelled to purchase what is effectively reinsurance from the state.
(*granted, it could happen but generally speaking, it's not the best business decision for reasons I said earlier)
Missing the forest for the trees, AS. If assumption 1 were true, then while doing so would be a bad long-term decision, its consequences would not be felt until after the company that made it had already put all the others out of business by taking all of their customers.
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Originally posted by Kuciwalker View PostInsurance companies don't default even if they regularly undercharged customers because their revenues are derived primarily from investments, not premiums.
No, insurance companies don't default because they face extraordinarily tight regulations and [at least in the United States] are compelled to purchase what is effectively reinsurance from the state12-17-10 Mohamed Bouazizi NEVER FORGET
Stadtluft Macht Frei
Killing it is the new killing it
Ultima Ratio Regum
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Originally posted by Kuciwalker View Post
No, insurance companies don't default because they face extraordinarily tight regulations and [at least in the United States] are compelled to purchase what is effectively reinsurance from the state.
Regulations and re-insurance have nothing to do with this except for the point that I mentioned earlier that insurance companies are compelled to purchase re-insurance because of regulations limiting uninsured policies to a ratio of net worth. Therefore, they purchase reinsurance to be able to issue more policies which gives them a larger float to invest, economies of scale, and all that good stuff.
Missing the forest for the trees, AS. If assumption 1 were true, then while doing so would be a bad long-term decision, its consequences would not be felt until after the company that made it had already put all the others out of business by taking all of their customers.
The point is this conclusion:
conclusion: the equilibrium state of the insurance market is one where insurers universally underchargeand regularly default"Flutie was better than Kelly, Elway, Esiason and Cunningham." - Ben Kenobi
"I have nothing against Wilson, but he's nowhere near the same calibre of QB as Flutie. Flutie threw for 5k+ yards in the CFL." -Ben Kenobi
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Looks like underwriting profitability tends to be mixed. There isn't consistent undercharging:
According to an A.M. Best Co. statistical study, the total industry registered a 104.7 combined ratio in 2008, compared with 95.1 in 2007. The combined ratio for the top 25 writers based on net premiums written rose to 102.3 in 2008 from a profitable 94.5 the prior year."Flutie was better than Kelly, Elway, Esiason and Cunningham." - Ben Kenobi
"I have nothing against Wilson, but he's nowhere near the same calibre of QB as Flutie. Flutie threw for 5k+ yards in the CFL." -Ben Kenobi
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Holy ****, AS, you just don't get it. The reason insurers behave the way they do - the reason they have the reserves they do, the reason they have the little equity slush fund on top, etc. - is because they are tightly regulated. Thus saying "they won't go bankrupt because they do all these things to obviate the possibility" is pointless, because the relevant issue is that they are forced to do those things.
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I checked out some statements and looks to me that typically, insurers have average investments around or greater than their yearly premiums.
And yeah, I'm sure Berkshire Hathaway invests only because of regulations
From their 2009 letter to shareholders:
Insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect-now, pay-later model leaves us holding large sums – money we call “float” – that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims come and go, the amount of float we hold remains remarkably stable in relation to premium volume. Consequently, as our business grows, so does our float.
If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that adds to the investment income produced from the float. This combination allows us to enjoy the use of free money – and, better yet, get paid for holding it. Alas, the hope of this happy result attracts intense competition, so vigorous in most years as to cause the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Usually this cost is fairly low, but in some catastrophe-ridden years the cost from underwriting losses more than eats up the income derived from use of float.
In my perhaps biased view, Berkshire has the best large insurance operation in the world. And I will absolutely state that we have the best managers. Our float has grown from $16 million in 1967, when we entered the business, to $62 billion at the end of 2009. Moreover, we have now operated at an underwriting profit for seven consecutive years. I believe it likely that we will continue to underwrite profitably in most – though certainly not all – future years. If we do so, our float will be cost-free, much as if someone deposited $62 billion with us that we could invest for our own benefit without the payment of interest.
The raison d'etre of insurance companies is to invest premiums before they have to pay them out in claims and generate a profit from investment returns. Regulations isn't why this is so. It's the nature of the entire industry regardless of regulations.
Don't think like an actuaryThink like a banker... You bring in cash but it's tied to liabilities that will be due some time in the future (someone's saving account or someone's insurance policy); you have to pay them a bit more than you bring in (interest or a claim that was higher than the premiums brought in); but in the meantime, you make your money with all this cash that you're holding on to.
(I realize commercial banking is or was heavily regulated but having to keep reserves didn't change the basic business model; and yes, there are differences between insurance and banking but the simplified analogy is still valid)
Now regulations limit WHAT they can invest in but they wouldn't stop investing if it weren't for regulations.Last edited by Al B. Sure!; July 17, 2010, 20:38."Flutie was better than Kelly, Elway, Esiason and Cunningham." - Ben Kenobi
"I have nothing against Wilson, but he's nowhere near the same calibre of QB as Flutie. Flutie threw for 5k+ yards in the CFL." -Ben Kenobi
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What are you saying, Kuci? From the original post:
conclusion: the equilibrium state of the insurance market is one where insurers universally undercharge and regularly default
Why do you think they don't default because of regulations even if they universally undercharge? How do regulations change let's say a 105% combined ratio and the inevitable default in the absence of investments?Last edited by Al B. Sure!; July 17, 2010, 21:04."Flutie was better than Kelly, Elway, Esiason and Cunningham." - Ben Kenobi
"I have nothing against Wilson, but he's nowhere near the same calibre of QB as Flutie. Flutie threw for 5k+ yards in the CFL." -Ben Kenobi
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Originally posted by Kuciwalker View PostThose were supposed to be two distinct reasons - "tightly regulated" and "required to..." [obviously the latter is a subset of the former].12-17-10 Mohamed Bouazizi NEVER FORGET
Stadtluft Macht Frei
Killing it is the new killing it
Ultima Ratio Regum
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Also, Albert is a ****ing moron.12-17-10 Mohamed Bouazizi NEVER FORGET
Stadtluft Macht Frei
Killing it is the new killing it
Ultima Ratio Regum
Comment
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Originally posted by KrazyHorse View PostAlso, Albert is a ****ing moron."Flutie was better than Kelly, Elway, Esiason and Cunningham." - Ben Kenobi
"I have nothing against Wilson, but he's nowhere near the same calibre of QB as Flutie. Flutie threw for 5k+ yards in the CFL." -Ben Kenobi
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