CDZ How does Insurance really work?

[Chuz Life]

Imagine this scene before modern day insurance existed.

One guys is talking to another.

It's payday and they are talking about and comparing their incomes, expenses, etc.

Both men reach the same conclusion that the cost of medical care is just too high. Neither of the two can afford to pay for their own.

A third guy who was listening in decides he sees an opportunity.

He tells both men to each give him a small portion of their income each payday.

From those contributions, the third (insurance) guy claims he can not only cover BOTH the two employees medical expenses but also his own as well. AND, the insurance guy will somehow have enough left over to build an office building, hire employees, give them all benefits too, keep the utilities paid, take vacations etc.

This is simplified to the extreme to make a point.

You can't take more out than you put in and still remain solvent and the markets respond to all of the above accordingly.

Any thoughts?

 

[usmbguest5318]

Imagine this scene before modern day insurance existed.

One guys is talking to another.

It's payday and they are talking about and comparing their incomes, expenses, etc.

Both men reach the same conclusion that the cost of medical care is just too high. Neither of the two can afford to pay for their own.

A third guy who was listening in decides he sees an opportunity.

He tells both men to each give him a small portion of their income each payday.

From those contributions, the third (insurance) guy claims he can not only cover BOTH the two employees medical expenses but also his own as well. AND, the insurance guy will somehow have enough left over to build an office building, hire employees, give them all benefits too, keep the utilities paid, take vacations etc.

This is simplified to the extreme to make a point.

You can't take more out than you put in and still remain solvent and the markets respond to all of the above accordingly.

Any thoughts?

Any thoughts?

Well, just the following...

One guys is talking to another.

It's payday and they are talking about and comparing their incomes, expenses, etc.

That's a gauche topic of conversation. One's financial position is best kept between oneself, one's spouse and one's financial advisors, and one's creditors. Little good comes of sharing that kind of information, much less when it's not only shared but also compared. Our duty as individuals, and on an individual level, is to do the best we can with the resources and talents we have available to us. The minute one starts to compare one's financial position with that of others, the likely outcome is jealousy and envy.

This is simplified to the extreme to make a point.

As you've rightly noted, the story is grossly oversimplified, at least for it to have any allegorical value for spurring substantive discussion about the insurance industry. Some of the key and very high level elements that one must necessarily consider for any discussion about the nature of the insurance industry, and that are in your illustration not present in even radically simplified form, include:

• Measures of risk and the corresponding reserve requirements based on risk
• Rates of return on investments of premium revenue
• Reinsurance
• Scale and quantity of parties one insures and scale's role in the business (how you came to even discuss the insurance business using a model comprised of three individuals is beyond me)

Yes, one cannot run a successful insurance company if one covers more losses than one can cover using the cash received from premium revenue and investments of premium revenue.

It is because those key elements are not represented that my comment above regarding the tawdry nature of the men's conversation is the best I could muster to say about the story's actual content, thus why I made no insurance industry specific remarks.

 

[FA_Q2]

Yes, one cannot run a successful insurance company if one covers more losses than one can cover using the cash received from premium revenue and investments of premium revenue.

I think that the above needs to be pointed out again. A lot of people do not seem to understand that the insurance company does not simply make money directly from premiums but from using those premiums for investment. They could not remain solvent any other way.

 

[jwoodie]

Insurance is a pretty straightforward concept without government intervention or coercion. However, the invention of insurance as a mandated requirement (auto insurance) and/or tax-free fringe benefit (health insurance) has inflated its cost way beyond its actual value. That is why there is such a discrepancy between insurance and non-insurance charges for car repairs and medical services. Unfortunately, most people have been convinced that someone else is paying for these additional costs.

 

[FA_Q2]

Insurance is a pretty straightforward concept without government intervention or coercion. However, the invention of insurance as a mandated requirement (auto insurance) and/or tax-free fringe benefit (health insurance) has inflated its cost way beyond its actual value. That is why there is such a discrepancy between insurance and non-insurance charges for car repairs and medical services. Unfortunately, most people have been convinced that someone else is paying for these additional costs.

I would add the insertion of your employer as the insurance customer rather than you. That takes the person purchasing services (you) entirely out of the equation for the insurer and is one of the primary divers that is screwing up insurance in general.