Social Issues - Economies - Ramblings on Insurance

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 the price.

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]

You covered a lot of territory there, donwhite. Are you suggesting that private insurers be eliminated in favor of government insurance? I'm sure you know that when the government wants to borrow money, historically, they've gotten it from insurance companies. I guess this would cut out the middleman, so to speak, if that is what you are suggesting.

posted by GradyPhilpott

“ . . Are you suggesting private insurers be eliminated in favor of government insurance? When the government wants to borrow money they've gotten it from insurance companies. I guess this would cut out the middleman if that is what you are suggesting. [Edited by Don W]

Not at all. The current Medicare Supplement program allows all the companies - BCBS, Mutual of Omaha, AARP, and the company I buy from, Transamerica - to sell the policies direct to customers. The customer gets protection from the fact all policy plans are the same, that is, of the 12 standardized plans.

The most popular is Plan C, and all companies sell the same plan. I buy Plan F which pays all deductibles - and costs more. Last year I changed companies and I now pay $148.50 with T/A whereas BCBS would be $180. Without standardization, it would be impossible to know what one plan offered versus the others.

The Florida experience with Hurricane Andrew caused 1/4th of the companies to stop selling in Florida. Less competition means higher prices. The companies could not possibly charge enough to be able to pay the losses a major storm can cause. Like Katrina. Only the government can be a super insurer or a re-insurer. Instead of assessing Florida 8%, I’d rather see the entire US be assessed say, ½% in the Andrew example. After the fact. Many companies denied claims that should have been paid and delayed paying those they had settled. This is wrong. But if a company does not have the money, then it can’t pay.

Last, recall the Nine Eleven Event. All 7 WTC buildings were lost. The taxpayers - say the Administration - decided to pay the loss of the buildings and spared the insurance companies. The Administration felt so good about it, they allowed the insurance companies to retain the premiums they had collected!

Originally posted by donwhite
The Florida experience with Hurricane Andrew caused 1/4th of the companies to stop selling in Florida. Less competition means higher prices. The companies could not possibly charge enough to be able to pay the losses a major storm can cause. Like Katrina. Only the government can be a super insurer or a re-insurer. Instead of assessing Florida 8%, I’d rather see the entire US be assessed say, ½% in the Andrew example. After the fact. Many companies denied claims that should have been paid and delayed paying those they had settled. This is wrong. But if a company does not have the money, then it can’t pay.

Well, this is an interesting concept. On the one hand, there's the school of thought that says, if you want to live in a hurricane zone, then you should pay for the risks and benefits.

On the other hand, being a typical generous American, I would be willing to have a slight increase in my premium so that others do not have to pay outrageous premiums in order to live. After all, we all benefit from Florida even though we may not live there - they supply us with fresh fruit and veggies and vacation spots.

I would be careful about slipping toward socialized insurance, though.

posted by jsobecky

posted by donwhite
Private insurance companies could not possibly charge enough to be able to pay the losses a major storm like Katrine can cause. Only governments can be a super insurer or a re-insurer . . if a company does not have the money, then it can’t pay . . which is wrong. [Edited by Don W]

The Florida method is “after the fact” and does not assess money to sock away for a rainy day. The State of Florida has sufficient credit it can borrow on the bond market to pay the insurance loss claims, then collect back from the insuring public to retire the bonds. No cost to taxpayers.

The US could do this on a larger scale, or any state could do it and some may already do it.

Well, this is an interesting concept . . being a typical generous American, I would be willing to have a slight increase in my premium so that others do not have to pay outrageous premiums in order to live. I would be careful about slipping toward socialized insurance.

California has earthquakes, mudslides, canyon fires, and maybe other natural hazards I have overlooked. Most states have floods, tornadoes, snow, fires and some other sort of destructive event that impacts the community at large.

In my dreams, I’d like to see a plan where the property owner set his own pay-back - limited to the amount he pays taxes on - then require a $100,000 deducible which he could buy from an insurance company, and let that company adjust his claims for a agreed fee, so that everyone could be insured against the great calamities. We almost do that already, but not on a systematic basis and with no view towards recouping the taxpayers money. It would not take much to systemize it.



[edit on 8/4/2006 by donwhite]

Originally posted by donwhite
The Florida method is “after the fact” and does not assess money to sock away for a rainy day. The State of Florida has sufficient credit it can borrow on the bond market to pay the insurance loss claims, then collect back from the insuring public to retire the bonds. No cost to taxpayers.
:
California has earthquakes, mudslides, canyon fires, and maybe other natural hazards I have overlooked. Most states have floods, tornadoes, snow, fires and some other sort of destructive event that impacts the community at large.

Agreed. Every state has it's own set of natural disasters that it is prone to - if it's not hurricanes, it's flood, tornadoes, or blizzards.

It's not as if there's not enough money in the system - who has the biggest buildings, after all? The insurance companies.

Recall reading about or hearing about the gas stations on 2 or 3 corners of many intersections? It was believed the proximity of stations caused all 2 or 3 to have more business that they would have if standing alone.

Today, it is banks that are on every corner - or so it seems. Most of the old insurance buildings have been remained to banks and global corporations. On the scale of things, I believe insurance companies are in decline. Did not CitiBank buy Travelers Ins. Co?