8/16/2006

08-16-06 - 4

The insurance companies are showing again what scum-bags they are by refusing to pay for damages from Katrina. It's truly laughable in a sad Kafka-like way that they've actually tried to avoid paying any damage at all, since they claim the damage is from "flooding" (not covered) and not "hurricane" (covered). Just like with the World Trade Center crisis, a great tragedy hits our nation and rather than pay out policies, they pinch pennies and get subsidized by the Govt. Afterwards, they'll raise rates to pay off the little bit they did pay out. The way insurance is run in this country, it's a no-lose business. Warren Buffet is supposed to be this genius investor, but the truth is almost all of his fortune comes from insurance companies, which are basically giant corrupt money-gathering beaurocracies similar to my own ScamCo. A fair insurance company would have ups and downs; in fact, small insurance companies should often go out of business; only large insurance companies can survive major disasters, and they should take huge losses in those years. In fact, with massive unforeseen disasters, insurance companies should take losses that they might not make back for 10-20 years.

Here's the whole idea of insurance : say something bad might happen to me, there's a 0.1% chance of it per year and it would cost me -$100k. The average annual cost from that is $100. Rather than take the risk myself, I pay an insurance company the $100 each year - that is exactly enough for them to break even on the deal; they don't need any more money, but I also pay a little more for the administrative costs & to give them a profit. So, perhaps I pay $110 a year. Now, their profit on that should be about $5/year, which is a nice premium. If the bad thing every does happen they would have to pay out $100k. The next year, my premimum should still be $110, since the chance of the bad event didn't change, they just got unlucky and had to pay it. They can never make back that $100k from me - they take a big loss because they got unlucky and the bad thing happened. However, over a large enough customer base & time frame, it should all average out and they just make that 5% annual profit.

The problem is, every year they don't pay out, they're feel like they're getting $105 profit. The books look great and investors love them. They come to hate the idea of ever having to pay out damages. They want to make a profit from each policy, not the aggregate. They also start to feel like your premiums should pay for your damages, instead of it being a risk. So, say you get the bad event. For one thing they'll try to avoid paying. If they do pay, they'll bump your premium to $500 or something in order to get you to pay off the damages.

Some insurance consumers don't realize how wrong this is. They think of insurance as sort of like "life insurance" where you're paying your premimum in to an account, and when something bad happens it comes out of your payments, and your payments might go up to balance that account. That's not at all how it works and it's their manipulation to make you think that. Insurnace companies also manipulate the markets to suggest that they have pay out from their income. That's far from true; insurance companies should be prepared to pay out far more than their income.

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old rants