I thought, I blogged …

7 September , 2010

Profit by insurance companies ?

Filed under: Blog — Ranganathan @ 11:56

Insurance, by principle, works on probability & statistics.
Statistics, together with historical claim data, gives the probability that a claim will be made for a given case.
That is why, for situations with probability = 1 for large populations, are promptly listed in the ‘exemptions’ list. (earthquake, nuclear damage, war, health-insurance after90 yrs age, death after 100yrs age, & so on).

Ideally, it is understood that insurance companies get premium as input & give out claim settlements, and get to keep ‘some’ portion to pay salary, bills, etc. Premium is calculated based on the insured stuff’s value, risk ( = probability of damage ), owner’s profile, etc. That is why they insist on medical checkup for Life Insurance, vehicle RC,FC,inspection etc for vehicle insurance, house inspection for property insurance etc.

With these, how are insurance companies able to post hundreds of crores of Rupees as profit every year?
1. Perhaps they are getting far more amounts as premium, than the claims they are paying out. This implies that the customers are being grossly overcharged than what the statistics & probability models reflect.
2. Probably they are investing the money and getting returns from them.

Is there a transparent reporting requirement for the insurance companies to declare the break-up of their revenue and profit from premium and from investment returns ?

Good if there is one. If not, then they are simply pocketing the premium money from investors.

Further, if they earn returns by investing customers’ premium money, don’t the customers have a right over the returns?
Okay, since this is paid as ‘insurance premium’ focussed on damage-claims, perhaps the customers are kept insulated from both profits as well as losses from the investments made by the company.

Nevertheless, shouldn’t this reflect in the form of lesser premiums?
This will increase good competition, and benefit the customers.

However, during bad times, all players will increase the premium charges, and will end up as double-whammy to customers, since they are already facing tough times, and need to pay extra premiums too!

What if the insurance companies’ big investments flop?
Firstly, they should be prudent enough to anticipate this, and have good balance of low& high risk investments.

What if still they lose a lot of investments *and* there are huge claims (like 2008 plus Mumbai attack claims)
Sad point. Perhaps there might exist some nexus with mega money lenders who can lend money tide over this.
This is a nice point to think about.

Ranga šŸ™‚


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