“Insurance is the most costly of all methods of handling loss exposure”, true or false?
Just like Vegas, big insurance companies weren’t built by trading money with their customers. They have shareholders to satisfy and they demand an adequate return on their investment.
The law of large numbers is at work. For each insurance buyer that pays too little premium to absorb their own loss activity, there are many others that contribute excess premium to offset those losses and turn a profit for the insurance company. Historically, insurance companies have relied heavily on investment returns to close any shortfall in reaching this objective. When the investment markets don’t cooperate, they can always raise the rates of their customers to achieve their corporate objectives. Maybe not instantly, but over time they will. Shareholders will demand an adequate return on their investment.
Some would say, In the long run that every account will pay for its losses. For middle and upper markets accounts this statement is particularly true. The larger the premium and size of a business the more credible is their specific loss history in determining what is an appropriate premium for the risk. As size increases, underwriters begin to utilize “loss pick” pricing strategies. An accounts actual historical experience begins to weigh heavily in determining the premium charged, to a point. This makes sense.
However, the reality remains that the best accounts, those that rarely use their insurance or those that contribute significantly to the “profit” pool of the insurer, rarely get a fair shake in their insurance buying transaction. Their excess premiums are used to pay for the losses of others—risk sharing. It’s all gone, the profit that is- the insurance buyer retains none of it. They do not receive any benefit from investment income earned on those monies either. The insurance company keeps it—like Vegas.