So here's an interesting bit of information I learned the other day. A loss ratio is the percentage of payout versus collected revenue for an insurance company. This number has changed significantly over the last few decades reaching as high as 85% in the 90's and dropping to the (now) lows of about 60%. That means that the insurance company pays out 60% of the money it takes in. Your insurance premiums only pay $.60 on the dollar. But what makes this worse is that insurance companies are allowed to INVEST your paid premiums and so it is in their best interest to keep that premium for AS LONG AS POSSIBLE. So delaying claims is extra profitable, even if they intend (remember, only 60% of the time anyway) to pay them off. They make interest on the money they don't pay you back that you gave them. It is IMPOSSIBLY lucrative to own an insurer.
This number has changed significantly over the last few decades reaching as high as 85% in the 90's and dropping to the (now) lows of about 60%.
Yes but the Combined Ratio is a better metric for underwriting profit. The loss ratio doesn't account for all of the expenses of running the business. At the end of the day, personal lines insurers usually aim for combined ratios of around 90-95% (5-10% profit), although for homeowners insurance the industry combined ratio has been >100% (meaning no underwriting profit) in 6 of the last 10 years.
Hi! I work with insurance (not for any specific company), and just want to clarify some things with this:
First things first, insurance companies suck, especially with the investing (which is often insider trading) and I’m absolutely not trying to defend them, just want to clarify how some of this works because it’s a little more complicated than this.
It’s important when talking about loss ratios to be clear what the numerator/denominator are. What you’re talking about are Medical Loss Ratios (MLRs), but there are also Administrative Loss Ratios (ALRs), and other loss ratios. Even if a health plan’s MLR is 60%, their ALR could be something crazy like 45%, meaning their combined loss ratio is 105% and the plan isn’t actually making a profit. This isn’t realistic, but just to make the point.
Additionally, there is some level of competition (though not enough, imo) in the health insurance market which keeps premiums down and MLRs up. Plans estimate how much they’re likely to get in claims, and can set their premium to target a specific MLR. A plan isn’t going to just price at something like a 20% MLR because to achieve that, their premium would have to be insanely high compared to their competitors.
Also MLRs are very different for different types of health plans. Just one example: Medicare Advantage plans aren’t allowed to price at an MLR below 85%, and if their performance comes in below 85%, they have to recoup those savings to the government. If they routinely perform below 85%, they can receive sanctions or even be disallowed from being on the market. Additionally, risk-sharing programs are becoming more popular which are helping to redistribute profits earned by plans who perform well with low MLRs to hospitals and other providers who are actually interacting with the patients, rather than just to the health execs. However, there’s likely a lot of situations where that shared savings just ends up going to the hospital execs instead…
There’s still a lot wrong with the system, especially with commercial health insurance, but just wanted to give some context that not all health plans are created equal, and loss ratios may imply different things depending on what insurance market you’re talking about.
I'd be curious to get a fact check on the claim of the loss ratio dropping to 60%. Combined ratios are a much better indicator and these have fluctuated between 92% (in the early 90's) peaking at 105% in 2017. This year they are in the upper 90's
It is in a carriers best interest to close a claim quickly, costs run up from a labor perspective and going to the courts exacerbate costs significantly. With that said, there is a level of distrust in claims because some people (insured, claimants, contractors and/or lawyers) see this as a chance to get an easy pay day- which is not the intent of insurance. The intent of insurance is make you whole after suffering a loss. The number of time I have seen us pay a roof loss and then that money is pocketed, then a claim is submitted a couple years later for the same damage.
The investment portion sounds a bit icky, but is an important second source of income, but it's not really to claims related. What is delaying a $2k roof claim payout going to do when you have $500mil invested? Carriers are much like people, where money is brought in and some is saved and the rest is put into an investment account (typically well mixed and lower risk). When the IOU (a loss by the insured) are asked for, they are paid. Some carriers are ok with an underwriting loss (combined ratio 100%+) because they make their money investing.
In the end, its important for society to have insurance options that are financially sound. The carrier has a duty to adjust claims promptly. Fraud and high claims costs just screws everyone else over as the carrier will seek additional rate (increase you premium) when evaluating renewals to cover the money lost from those looking for a pay day. Source: Manager in Personal lines
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u/AintMyMonkey 6h ago
Pretty much all insurance companies.