A sucker bet

Posted on Wednesday 21 March 2007

From the comments on a NOLA post this weekend:

In the mean time, half the state is losing their insurance. Mine got canceled this week…because I’d held it for under three years.

I could feel wisps of steam starting to waft from my ears when I read that. That’s a reason to cancel someone’s policy???? Is that legal?

Evidently, M (the commenter) had merely received her letter before Da Po’ Boy:

Today’s insurance company frustration post was inspired by this letter I received from my agent, caps and italics in original letter:

AFTER MUCH DELIBERATION AND ALONG WITH MANY OTHER MAJOR INSURANCE COMPANIES, ******** ******** HAS FOUND IT NECESSARY TO EXERCISE A REGULATION THAT ALLOWS INSURANCE COMPANIES TO NON-RENEW ANY EXISTING HOMEOWNER POLICY THAT HAS BEEN IN FORCE THREE YEARS OR LESS.

When I received this letter, I had held the policy for two years and 10 months.

I do appreciate the candor expressed in the letter, however:

THE COMPANY FEELS THAT THIS WILL ALLOW THEM TO REDUCE THEIR PROPERTY EXPOSURE IN SOUTHERN LOUISIANA, WHICH THEY FEEL WILL ALLOW THEM TO CONTINUE TO OPERATE IN OUR STATE.

What The Company means by that, of course, is they’ll “continue to operate” right up until something happens elsewhere — which it inevitably will — at which time the poor sucker homeowner foolish enough to file a claim will either be cancelled, or his/her rates will rise beyond reach.

* * * * *

Polimom usually thinks of insurance as hedging a bet.

We buy it because loss or major damage to the asset we’re covering — whether auto, health, or property — will wipe us out. We also know that this asset’s number will eventually come up. It might be tomorrow, or two years from now, or twenty — but one day, it will happen.

One can only throw the dice so many times before hitting snake eyes… and that’s true for the insurance companies, also. They have an advantage, though: they can take their cards off the table and go elsewhere. They hedge their bets by refusing to play the game any more.

That’s not an option for most people. Back to the comments:

I have a friend whose insurance was upped $5000 at her renewal this year.

That’s one heck of a raise. How much would you be willing to give up to sit at this table, knowing you may ante up indefinitely, but will be permanently barrred from play the first time you call? Me — I have no problem seeing why folks might choose to sit this rigged game out.

* * * * *

This magical little game of “pay us indefinitely, but don’t expect to be able to use the insurance or you’ll lose your coverage” is what’s behind numbers like these (from the Galveston County Daily News, via Da Po Boy, my emphasis):

State Farm Insurance, the nation’s largest insurer, recently said profits climbed 65 percent to $5.3 billion, up from $3.2 billion the year before, even after paying claims for Katrina and Rita.

Allstate earlier reported 2006 earnings rose to a record $5 billion.

In 2005, the premium-loss ratio averaged a healthy 57 percent — that is companies kept 57 cents of every premium dollar collected, according to the state.

So — let’s make a bet. I’m willing to wager that next year, the insurance companies — having off-loaded all identifiable risk in an industry that’s theoretically all about managing risk — will again post stupendous profits.

Any takers?

6 Comments for 'A sucker bet'

  1.  
    March 21, 2007 | 12:02 pm
     

    That would be a sucker bet. Of course the insurance cos are gonna post record profits. If they didn’t their shareholders would sue them into oblivion.

    I love the insurance racket game. It is a lottery that we can be required (either by law, or by contract) to play, but if we hit the jackpot (if you can call losing everything you owned “hitting the jackpot”) then the other side can simply refuse to play with you any longer, thus putting you in violation.

    ~EdT.

  2.  
    March 21, 2007 | 1:15 pm
     

    Like Ed T says, if they don’t share holders will be all over them.

    I am not sure I understand this world in which everyone ‘says’ they want companies to do good, but if you find out that the CEO passed up the chance to make a couple of billion profit by doing good, then you jump all over him.

    And if some CEO only makes OK profit, but does no harm, then you get rid of him so you can make big profit.

    It is time to ask which is more important; your pocketbook or your conscience?

  3.  
    March 21, 2007 | 1:16 pm
     

    Insurance is a geat example of market failure.

    How do you make an insurance system work? By diluting risk. So for everybody who’s going to “hit the jackpot” by having some disaster that means a payout much larger than what they’ve paid into the system, there’s everybody else who’ll never get their money back. (What they do get, theoretically, is peace of mind knowing that they won’t be financially ruined by some future disaster.)

    The problem is that for the insurer, the surest way to increase profits is to eliminate risk by getting rid of anybody who is more likely to have just such a disaster. So, if you provide health insurace, you can make more money by only insuring people who don’t get sick.

    So the profit motive of a private insurer is directly at odds with the whole point of insurance.

    We try to deal with this through regulation, because a totally free market simply fails in this industry – and leaves taxpayers holding the bill (yay, externalized costs!). THe problem is, the insurance industry has deep pockets for lobbyists to make sure that they don’t get too regulated.

  4.  
    March 21, 2007 | 2:15 pm
     

    [...] (Cross-post from Polimom Says) [...]

  5.  
    March 21, 2007 | 7:31 pm
     

    So the profit motive of a private insurer is directly at odds with the whole point of insurance.

    That’s exactly how it looks to me.

  6.  
    M
    March 21, 2007 | 10:15 pm
     

    So glad you’ve got this conversation, going, Polimom, it begs for attention. The part that bothers me the most is that I am not just paying a high premium for choosing to live in a hurricane prone state as I was pre-Katrina, I have lost my insurance (wind and hail only, by the way, my insurer is “kind” enough to continue insuring me at a higher price for a policy that no longer includes wind and hail.) because of the catastrophic results of the army corps of engineers’ negligence. How can that be? But there is no option, I must pay for insurance because I have a mortgage. So I will now have to pay twice my former premium, and I will now have three insurers, one for flood, one for wind/hail, and one that excludes absolutely everything that occurs when either of the first two occurs but must cover something, right??? The latter, by the way, includes a few hundred dollars that the state’s Fair Plan charged back to private insurers b/c the state’s plan couldn’t afford to pay its Katrina claims…the law allows the state plan to levy a charge on private insurers who can then make their insureds pay to recoup their loss. SO, my private insurer is charging me to pay for the state run plan on top of the premium I paid and the premium I will have to pay to the state run plan for wind and hail coverage.
    Since i have no faith that the state-run plan would reimburse me if there were another disaster, I see my choices as praying or moving.

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