Insurance Nightmares

Let’s face it, insurance is a huge pain in the ass. It’s a reoccurring, monthly (or annual) kick in the pants that you look at a say, “why do I even have to pay this?”. But eventually, you come to the grim realization that bad stuff happens and you need to be prepared for it when it does.

It certainly doesn’t help when your annual statement shows up and your premium magically increases by 3%, but I digress, we all know that inurance is a necessary evil. However, knowing “what” insurance is (or does for you) doesn’t imply that you know how to use it without ending up as a horror story on this website.

Before we get into the issues around insurance, the nightmares so to speak, we need to lay out a common definition of what insurance is. Luckily for us, we have this trusty website to guide us through the definitions. It’s literally called Get The Basics To Help You Understand How Insurance Works (insert nerdy smiley face) – good for them!

When you buy insurance, you make payments to the company. These payments are called “premiums.” In exchange, you are covered from certain risks. The company agrees to pay you for losses if they occur. Insurance is based on the idea that spreading the risk of a loss, such as a fire or theft, among many people makes the risk lower for all.

The assesment of risk is prepared by an actuary and based on the probability of any number of named losses occuring. The actuary takes into consideration factors such as proximity to water or sealevel for flood insurance, the number of lightning strikes or propensity for heavy storms for storm-related coverage, the age, driving experpience and vehicle type of young drivers – you get the point.     

The insurance company has many clients. They all pay premiums. Not every client will have a loss at the same time. When a loss happens, they may get insurance money to pay for the loss.

The definition implies that premiums are collected from many clients solely to pay for losses (fire, water or theft damages) in the event that one client experiences a loss. However, what the company fails to tell you is that they make money off your premiums over and above that is paid out for claims… LIKE TONS OF IT!  

So it’s in the company’s best interest to pay the smallest amount possible when you DO have a claim. The more money they keep by cheaping out on your claim, the more money they give to their investors, the more profitable the company. 

The math on how much money they make is staggering. As an simple exercise, if we say the average home owner pays $1,500 per year for home insurance. The company has 100,000 paying customers which totals $150 million per year income. 1 in 20 homeowners open a claim every year with an average of $15,000 per claim instance. So, the company pays $75 million in claim-related damages yearly and keeps $75 million. Of course, my example is unsofisticated and over-simplified, BUT if we’re dealing with averages here, it’s pretty easy to see that insurance is hardly a fiduciary business model. 

How does this relate back to an individual home owner with a $15,000 water damage claim? Simply put, if the company can get away with paying you $12,500 instead of $15,000,  the company saves themselves 16.7%. So $2,500 on top of what they made off their actuarial assessment of risk on an individual claim, or a cool $12.5 millon dollars if they do the same to all their customers that have claims in a given year.

On a side note, this is EXACTLY why insurance companies are such good investments!

You might be thinking, “The company is legally bound to pay me what they owe me… I have an insurance policy.” Trust me when I say, the insurance company will only pay you what they think they can get away with paying you. It’s your job, responsibility, duty (et al)  to make sure they pay you what your policy SAYS they should pay you.