posted on Aug, 3 2006 @ 07:42 PM
I would like to discuss briefly two kinds of insurance. 1) Life insurance. 2) Property insurance.
For 9 ½ years I worked as a claims adjuster for Calvert Fire Insurance, Travelers Insurance and State Farm Mutual in Florida. I handled claims in
Kentucky, Indiana and Florida.
Insurance is a unique product. It is not an arms-length commercial transaction. It is not a caveat emptor - let the buyer beware - contract. The
purchaser must truthfully reveal to the seller personal information including the state of his health and his credit standing among other facts. He
must permit free access to and disclose the true value of the property he wants to insure. Failure to tell the truth may void the insurance policy.
Uncommon terms, such as coverages, options, waivers, exclusions, limitations, definitions, fair market value, replacement cost, deductibles, and
pre-existing conditions are all terms of art to the industry. These and others as well. The buyer gets little unbiased help or useful information
from the seller when deciding what or how much insurance he needs. Customers usually buy what the company’s agent recommends, assuming he can afford
Life insurance. A basic life policy, called ordinary life, collects premiums for as long as you live. Actually, all life insurance polices
end at age 100. The insurance company will pay off the policy when the insured reaches age 100. The insurance company charges you enough in premiums
over the years to collect from you the amount they bargain to pay your beneficiary on your death, plus money for the sales commission and a policy
maintenance fee. To lower your cost and to make their policy more attractive, the company will give you a set-off or credit based on the interest it
can earn on your money before you die.
Some people die “early.” Before the actuarial tables indicate. The insurance company must charge you and its other policyholders enough extra
money to cover those premature payouts. If it works out as planned, your beneficiaries will receive the face amount of the policy when you die and the
insurance company will make 4%-8% profit on the premiums.
Property insurance. It is a wise property owner who insures his property against loss by highly predicable natural hazards. I’m thinking of
wind, hail, fire, or collapse caused by earthquake. Hurricanes and tornadoes. There are other hazards too, like mudslides, falling objects, mold and
so on, but I’m not too much concerned about those here.
Flood insurance by the way, is a contradiction in the eyes of the insurance industry. If your property is in the flood plain, you cannot buy flood
insurance. If it is not in a flood plain, you don’t need it. The risk of loss to property in the flood plain is considered to be 100% and therefore
insurance, which is a sharing of the risk of loss, is not available. For social and political reasons, the Federal government provides flood
insurance sold and administered by private companies. Property that is mortgaged or serves as collateral must be insured at the borrower’s expense
to protect the lender’s interest as a requirement of the loan or pledge.
Why have I stated the obvious? I am suggesting the time of private insurers is past. Dating as far back as recorded history, Roman merchants sold
shares of trading voyages to divide the risk of sinking and to “insure” the cost of the voyage. A similar concept of risk sharing was carried on
in the late Middle Ages in Venice, Holland and at Lloyd’s of London.
In America, in the 1850s, the Travelers Insurance Company began business by selling a $50 accidental death policy for two cents to train passengers,
then a risky way to travel. America's original trip insurance policy. The 1992 Hurricane Andrew caused damage of $45 billion in today’s dollars,
primarily in Florida. The State of Florida had to “back up” private insurers who would not or could not pay all their claims. In January of this
year, the State of Florida ordered the final payback installment of $400 million for Hurricane Andrew. Where did this money come from? It was raised
by a one-time levy of an 8% surcharge on the premiums of all homeowners and property insurance in Florida.
Conclusion. I suggest the Medicare approach be tried in both life insurance and property insurance. Medicare Supplement policies are written in
10 standardized versions with 1 option in 2 of the versions, making a total of 12 choices. All private insurers are required to carry the basic
policy, Plan A, and one other plan. Each company is free to offer as many of the other standard plans and is allowed to innovate plans of its own, but
Plan A and a second plan cannot be changed by any company.
The standardized plan makes It easy for customers to find the lowest cost insurance policy knowing the companies are offering the same coverage in the
same plan. He can choose the coverage he wants and can afford. He does not have to get an MBA to know how to read a policy.
There is no magic in life insurance, nor in property insurance. Each can be calculated by loss experience to a fine degree of predictability. To be
competitive variations in policies are the way many companies use to attract customers, some of which variations are more gimmick than value for
money. In part due to the variety of policy forms, it is easy to misunderstand what you bought and what is owed in case of a claim. This variety
causes disputes and results in law suits. This could be avoided, IMO, to a considerable degree, if the same policy offered the same protection,
whether for life or for property, in Portland ME as in Portland OR. In this way, companies can compete by doing a better job and customers can get
reliable insurance for affordable prices.
[edit on 8/3/2006 by donwhite]