From time to time I get a call that truly enlightens my view on an industry or issue. The last time this happened was in 2008 when Sub-Prime lenders started calling me and giving me a real education about what was really happening (and why they were concerned for their own security).
Today I got a call from the owner of an insurance company (not a broker or agent). After about an hour I realized that as bad as I thought it was, it’s worse. Here is what I learned:
- The Industry average is $1.08 in claims paid for every $1.00 in premium collected.
- This is possible because insurance companies don’t think “Insurance” is really their main business.
- 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.
- 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 Wall Street to hapless investors). But what happens when the “Investments” in Real Estate and the Stock Market and Sovereign debt of Greece, Spain and Italy 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 (like adventure outfitters in the Grand Canyon). 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.
If you would like access to a more detailed conversation about just this subject I recommend you watch my interviews at www.mindofmoney.com
there’s a few things i’d like to add to this article. first of all, there are numerous areas of insurance, and those include personal and commercial property, casualty, liability, health, life, annuity, pension, municipal, inland marine, etc. i have worked in several of these fields, and many companies, especially their management and agents are hugely successful. probably more than many deserve to be when you consider they add little to no value to the actual insurance product and the risk protection it’s intended to provide. they get paid for marketing. aig, along with hartford and several other companies have no one to blame but themselves. these were ‘too big to fail’ insurers that essentially underwrote and insured greedy financial speculators selling ponzi schemes, credit default swaps, and other other exotic, difficult, even impossible to understand derivatives which had a major potential for failure. the companies were warned by experts in the insurance field as well as ‘cranky’ critics of hyper capitalism that insurance world could come crashing down upon everyone’s heads, as it ended up doing. in the meantime, aig execs rewarded themselves handsomely with outrageous $100m salaries, stock and bonus packages and trips to exotic locales. this one cocky aig wise guy made some flippant remark the other week about americans needing to save more money for the future. oh, really? and invest it with whom: aig?! screw me once, shame on you! luckily, our government, which practices socialism for the rich and rugged individualism for the rest of us, bailed aig out and prevented a free-fall collapse that would’ve been even more catastrophic than what we’ve endured these past five years. insurance companies can and should indemnify their policyholders against risk if that were their primary purpose for being. and despite all the tea party rhetoric, we could also have a nationalized health care program (no, not obamacare!) managed by insurance companies and tpa actuarial firms that would be infinitely more cost-effective and better than the defective health insurance products insurers unload on us and from which they and their agents make wild profits. in the meantime, the insurance giants will continue to be ‘sharks’ and avoid as much claims payment as possible as long as commissions and bonuses continue to be the pillar of their business model. mind you, i have nothing against making a decent living or even making a profit. but what aig and other insurers did is whoring, pure and simple. it’s putting mammon ahead of any sort of concern for protecting lives and businesses so vital to the well-being of this nation. the only people who suffer in the end are the policyholders and the small investors who are caught unaware of the wheeling and dealing until it’s too late.