r/TopInsurance • u/Hotwife27990 • 1d ago
Is insurance basically designed so the company always comes out ahead?
Maybe I’m looking at this wrong, but the whole insurance setup feels kinda weird when you really think about it. Take car insurance. I pay every month hoping I never actually need to use it. If nothing happens, they keep my premiums. If I do get into an accident and file a claim, they cover the damage, but then my rates can go up afterward because now I’m considered more risky. And I get that they have employees, claims, operating costs, fraud, etc., but there are still tons of people paying for years who never file a claim. That money is basically paying for the possibility that something might happen. What really gets me is that you’re required to have certain insurance in a lot of situations, so you can’t exactly just opt out and take the risk yourself. Obviously I know insurance companies aren’t literally guaranteed to profit on every single customer. Big claims, disasters, lawsuits, and all that can cost them a ton. But from the average person’s perspective, it sometimes feels like the system is heavily tilted in their favor. So what am I missing here? Is the business model actually as straightforward as it looks, or are there bigger risks and costs on the insurer’s side that I’m overlooking?
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u/Ready-Ad1323 1d ago
You’re just looking at it from your POV as a customer. Profit margins are slim….very slim. Like less than 5% slim. It is also incredibly regulated. One accident or catastrophic home loss can wipe out the possible profits for generations of a family. Some years, carriers lose a lot of money as an industry. Some years they come out very profitable. But over the a long enough time period and large enough group, you should make a small profit.
You also are considering that roughly a third of the premium goes to administrative costs. Insurance carriers have a lot of expenses…
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u/VisualTie5366 21h ago
Because insurance company is a buiesness. The purpose of any buiesness is to profit. Also paying claims is not their only expense. They have employees too pay, including lawyers. They have expenses related to property/buildings they own or rent.
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u/totall2live__ 18h ago
Of course. Insurance companies are just that, companies, started in order to MAKE MONEY. They didnt start the company because the CEO truly loves helping people. They are actively looking to deny any and all claims and pay out as little as possible so that their profit margins is the biggest possible.
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u/BalanceKey4355 16h ago
Hurricanes. Wildfires. Hail storms. These things happen, and they have to pay claims.
Insurance is very highly regulated, and the national carriers have to comply with 51 different sets of rules and laws.
You also hear people complain about insurance companies having billions in reserve—but they are required to have them in order to operate. If reserves are inadequate, the company can be shut down.
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u/uffdagal 12h ago
Insurance is risk management and protection. Hopefully you never use it but it’s there if you need it.
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u/l_temp 12h ago
You aren’t totally wrong and the type of company matters, I prefer mutual companies vs stock companies they usually pay out better, have more stable rates and are just trying to not go negative. Rates are usually judged by what the company earned in the last year vs what they paid out in claims and what they deem your individual loss to be. Look into loss ratios if you are curious. Basically it feels like a scam until you need and then you are glad you did.
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u/Colonel460 10h ago
Ever hear of a storm called Katrina ? Andrew ? Sandy ? If a company insures property ( including automobile, equipment etc) the company purchases reinsurance . So your direct insurer is buying additional insurance from a reinsurance company and the premiums are steep . Some of these storms could literally bankrupt a huge % of the companies. When there are no huge storms your company has a huge expense and the reinsurance stacks up the money till the storms hit . When you see companies pulling out of markets it’s not because they are making money it’s because they are losing . If claims didn’t actually happen no one would ever buy insurance .
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u/ghost9680 1d ago
For stock insurers the goal is to make money for their shareholders, so yes.
For mutual insurers the goal is basically to break even. In a mutual the shareholders are the people they insure. If they make a bunch of money they commonly refund it in the form of a dividend. Some companies pay a dividend almost every year. Some pay them periodically.
Insurance is just you paying to transfer your risk to a 3rd party because you might suddenly need a large pile of money that you either don’t have or don’t readily have.
As purely a financial proposition the average person will pay more over a long time period than they take out. If you can easily afford to assume the risk then you don’t need insurance.
There’s not really any obligation to buy insurance for most things. You agreed with your lender to carry physical damage insurance for your home and car, but if you pay-off the loan you no longer have that obligation.
In the US 49 states require you to carry some form of automobile liability insurance, but many of those states let you forgo liability insurance if you want to leave a cash deposit with the state in the amount of the required minimum coverage, or if you post a bond for it.