How Insurance works?

Saturday 7 September 2013

We are all always wanted to Know How The Insurance Industry works?
How they are paying claims?
Here is what I got when getting through some articles around the web:
  1. The Industry average is Rs.1.08 in claims paid for every Rs.1.00 in premium collected.
  2. This is possible because insurance companies don’t think “Insurance” is really their main business.
  3. Rather, insurance companies want cash now (Premiums) to do what they really want which is to “Invest” which is were they really make their money.
  4. Then when they have to pay out money (Claims), if they have invested well, then they are still profitable.
PROBLEM: I am sure you can see that this works well in the short run (just like packaging worthless loans and selling them through Dalal Street to hapless investors). But what happens when the “Investments” in Real Estate and the Stock Market  don’t work out as well as they thought?

Simple, they collapse. This is precisely what happened to AIG in 2008 and what I just learned is that the ball is rolling again. Since my caller is a “Surplus” insurer, he is the first one to get the hard to insure cases . According to him, the big guys are starting to turn down these cases and even leaving some industries all together like the high-risk dog and exotic pet market.

What this means is that the insurance industries are trying to CUT out on the deal and don’t want to pay the claims since their investments aren’t working out. So what does this mean to you and me. Well, if you happen to be in an already hard to insure industry it may mean fewer choices and higher premiums. But not many of us are running skydiving classes or underwater shark feeding adventures.
The real concern is much deeper.

What happens to the entire industry when the “Investments” not only aren’t making up for the loss in premiums, but start having significant losses themselves?

I can’t answer in detail, because I really don’t know. What I do know is that the thought of major insurance companies failing harkens back to 2008 and AIG. And where there is smoke you can pretty much bet there is fire!

I have always worked to protect against “unlikely but potentially devastating risks.” I think what we are talking about above qualifies and my advice is to be extra safe in every area of your life right about now. That means your investments, your business and you assets. Uncertainty is not the friend of the markets, and that we are heading for increased uncertainty is the one thing I am pretty certain about.

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