If one insurance company tries to profit off exaggerated risk, a competing insurance company can offer the same protection at a lower premium and steal their customers. You don't make it in the insurance business by making short term decisions that hurt you in the long run.
Even more subtly, if there is one insurance company that makes a lot of extra return on their "float" (the money that has been paid in premiums but not yet paid out in claims), they may actually sell insurance that is a "bad bet", i.e. is expected to have underwriting losses, but that the time value of money makes profitable for them.
In that context other insurance companies can't compete unless they also are making huge returns on their float. It drives risky behavior by insurance companies in exactly the opposite way you'd prefer.
Even if all insurance companies are using fear to sell their product, they still have to compete with each other. The insurance industry is the boring financial industry, but is very vast with many nooks and crannies. The companies are making financial gambles estimating risk. And not every company has the same model or the same strategy. Some risks pay off, and sometimes they don't. And from what I understand, in the property and casualty business, the profit the companies make typically comes from investments of their capital and not their loss rates.
If you don't see the value of insurance, then don't buy it unless the law requires. And if you don't like the law, then do something about it.
But if you're family has money, or if you do, it would be smart to put a few bucks into your insurance policy and relax knowing that your capital is not at risk. And if you don't have a lot of money, its nice to know that there's cash available for you when something bad happens.
One situation: if they believe that their competitors will follow suit. Unless an insurance company concocts a way to lower costs that isn't easily replicable, they have little incentive to do so. Otherwise, they're just triggering a race to the bottom.
It is no more in an insurance company's interest to raise rates arbitrarily than it is for any other company. If one company's premiums are significantly more expensive than other insurers, they'll lose customers – and if what you say was true, any insurance company that realized this could cease the practice and gain many new customers.
That is the problem solved by competition. If insurers know that your risk is below average then they'll want your business and therefore want to underbid other insurers in order to get it. But so will the other insurers, until your premium comes down to reflect your risk. This works even if you don't know your own risk because all you have to do is pick the most attractive price.
Insurance isn’t without competition. If a group of customers are being overcharged relative to their measurable risk, then that’s an opportunity for a competitor.
> If a company attempts to raise rates because of a trend that doesn't actually exist, they will inevitably not be competitive with companies that recognize that the trend doesn't exist,
that assumes that all companies involved aren't doing the same thing. Corporations figured out a long time ago that when one of their competitors does something that makes them more money at the expense of their customers they could start doing the same thing to their own customers and profits increase for everyone without risking prices being driven down by a truly competitive market. The insurance industry in particular is has a long history of shady practices from good old fashioned collusion and price fixing to new techniques like data mining to charge customers different rates depending on where they live, what jobs they have, or how often they're willing to change insurance companies.
> Insurance companies don't like risks they can't quantify reliably. They either won't underwrite such risks at all, or they charge unreasonable premiums.
I believe there is a gap in the market for a new type of insurance company which regulates/inspects the insured to reduce the risks (and hence increase their profit margins while premiums get lower).
Isn't it how it works today? The insurer makes profit by taking the difference between the "real" risk and the risk that the customer is willing to pay for. I bet that the insuring companies have much better estimate of that risk than their customers.
Except they operate in a competitive and fairly transparent market, so it’s actually not like that at all. Insurance rates are very tuned for a variety of risk profiles to capture the specific risk segments the insurer wants to take on and they compete for price in that space. If you don’t like what it costs from A you might be able to find it cheaper with B, and B has incentive to do that.
Insurance has the worst moral hazard: the winning strategy is to sell a product that pretends to cover your customers but actually doesn't. Your customers give you money for nothing and they will only realize it once in a blue moon. You can probably buy off the few who are capable of causing actual blowback, and if that doesn't work just rebrand.
Until everyone becomes a contract lawyer capable of devoting weeks to insurance shopping every 6 months, the only good insurance market is a heavily regulated one, even though heavy regulation comes with its own gigantic bag of worms.
Why would they want that? Their job is to accurately assess risk, and then charge appropriately for insurance. If the risk goes down, so does the amount they charge. If your argument is that perception of risk will be higher than actual risk and therefore they'll be able to sustain a higher margin on their insurance policies, then I'd point out that you're completely ignoring competition. If one company does charge significantly more than they have to because the public perception of risk doesn't match reality, some other company will come in and charge less for the same policy, thus driving the price back down to an appropriate level.
Insurance companies that can better predict customer risk outcompete those that don't. They can charge less for lower-risk customers and still make a profit, thus drawing them away from their competitors and leaving their competitors with higher risk people who pay too little.
Yet, the end game is that everyone can predict risk so thoroughly that insurance is pointless.
It's ultimately a weird, backwards Tragedy of the Commons, and various non-discrimination laws are sort of the regulatory response to it.
Very good point. Conflict of interest is the real flaw in the insurance business model. What other industry makes more money when their customers slip up?!
Insurers try to protect their margin by finding ways to reject claims.
I am actually working on a company changing that by making money when settling claims instead of losing it.
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