THE MISLEADING CLAIM THE REALITY Insurance companies take Contrary to public perception insurance money from customers companies actually pay OUT in claims & expenses MORE than they take in from keep a cut for themselves customers! and give a little back The reason this doesn't put them out of business is because they pool the cash and invest it prior to paying it back outin claims giving them a second OVER revenue stream Their investment profits pay off their underwriting losses leaving them with an operating profit THAT WHICH CUSTOMERS PAY IN! exAMPLE-STATE FARMS 2015 FINANCIALS Charged customers $586 billion in earned premium Paid OUT $607 billion in claims& operating expenses therefore had an underwriting LOSS of$21 billion However it had pooled& invested that cash thereby earning a separate $4 billion from said investments After subtracting the underwriting loss State Farm's insurance companies had a $19 billion operating profit WAC THE MISLEADING CLAIM All insurance companies do is take money from customers keep a cut for themselves and then give a little back THE REALITY As will be demonstrated below this is almost never the case Regarding insurance companies did you know that not a single underwriting profit was recorded in the 25 years from 1979 to 2003? Even though that streak ended in 2004 underwriting profits remained rare In the eight years from 2004 through 2011 for instance only three tallied underwriting profits a So what's an underwriting profit and why should you care? Underwriting income is the difference between premiums collected from the customers and claimsexpenses paid out Huge claims and disproportionate expenses may result in an underwriting loss rather than an underwriting profit for instance b In other words because there is almost always an underwriting LOSS insurance companies are actually losing more money than they take in from their customers This point needs to be restated because almost no one believes it the first time it's said It's ENTIRELY A MYTH that insurance companies stay in business by charging customers X and then giving them back less-than-X in claimsexpenses So how is this possible? How do insurance companies stay afloat if they're technically losing more in claimsexpenses than they're taking in from customers? It has to do with the infrequently known difference between underwriting profit and OPERATING profit See the REAL business reason for writing policies and collecting premiums is not actually to profit from the premiums themselves Which would be an underwriting profit It's to build an investment pool Which might lead to an investment profit When an insurer collects premiums from customers it puts that money aside into an investment pool generally in guaranteed or low risk securities When a claim is made money is then taken from that pool and put into a cash account to pay the claim But what people don't realize is that at the end of the year insurance companies usually have paid out more than they originally collected Lucky for them because that investment pool was earning a second revenue stream the firm is able to pay off its underwriting losses and still post a profit Here's a real life example based on State Farm's 2015 Financials in case you don't believe it c • In 2015 it charged customers $586 billion in earned premium • It then paid OUT $607 billion in claims and operating expenses • It therefore had an underwriting LOSS of $21 billion Meaning it didn't withhold that which customer's had paid in • However in the time it had that pool of cash it invested it and earned a separate $4 billion from said investments • After subtracting the underwriting loss the State Farm insurance companies were left with a $19 billion pre-tax operating profit THIS is the miracle of the modern private sector insurance model It has found a way to give to customers more than they have paid in This is not to excuse valid criticisms against the industry as a whole and its not to suggest it's without faults but it IS to suggest that they generally aren't earning their profits by simply taking a cut of people's premiums for themselves ---------------------- Sources a httpwwwinsurancejournalcomnewsnational20120209234828htm b httpwwwinvestopediacomtermsuunderwriting-incomeasp c httpswwwstatefarmcomabout-usnewsroom201602262015-financial-results Full disclosure In addition to the aforementioned earnings and entirely separate from their insurance business State Farm also earned a net income of $3 billion from realized capital gains and $13 billion from its other non-insurance companies such as the State Farm Bank and its Mutual Funds But note these incomes came from subsidiaries that were NOT its INSURANCE businesses The above article was focusing ONLY on the insurance companies Meme











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