Employee Benefits | How Insurance Works |
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Employee Benefits | How Insurance Works |
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Insurance is defined as the pooling of resources to handle shared risk. That means that, in any group of people who share a similar risk (for example, home owners who live in the path of hurricanes), there are often sufficient resources to help recover from the damages of realized risk. That is because, as a group increases in size, the chance that all members of the group will be affected by any disaster decrease. We pool our resources by paying premiums for specific insurance policies to insurance companies. The companies take those premiums and invest portions of them in an effect to help increase the pool of money available for paying benefits to policy holders. Some portion of the premiums are used to pay for the companies' expenses (including paying the insurance agents who sell the policies). An insurance company typically makes little or no profit on the first two years' worth of premium. Insurance began in the shipping industry. Anyone who has studied archaeology either professionally or casually knows that ships have been lost at sea for thousands of years. The Mediterranean Sea is home to hundreds of sunken ships which have been found centuries or millennia after their owners lost them. Lloyds of London, the most famous insurance company in the world, began offering replacement options to ship-owners several hundred years ago. The owners paid fees to Lloyds. Unlike gambling, in which you are betting that you can beat the house, insurance is designed to cover anticipated costs. That is, Lloyds and their customers knew that ships would be lost. The losses often proved devastating to otherwise wealthy merchants, and by pooling their reserves, the merchants were able to replace missing ships and their cargos. As the industrial revolution transformed the western nations of the world, new insurance providers and policies sprang up. Medical insurance, the most commonly recognized and discussed insurance available in the United States today, has only been around for less than 100 years. Like the shipping industry's insurance, our medical insurance is designed to cover anticipated costs. We know most people become ill, suffer critical injuries, and need to take some sort of medicines. Insurance companies spread the costs across large groups of people to help make the cost of using doctors, hospitals, and pharmacies more generally affordable. Do insurance companies make a profit? Most of them do. In fact, the more profitable an insurance company is, the more competitive it can afford to be with its premiums. There are different kinds of insurance companies. There are mutual companies which are owned by the policy holders. There are commercial insurers who sell policies to a broad spectrum of individuals and groups. There are insurers who do little more than offer secondary coverage to other insurers. Insurance fraud is unusual in that it has been practiced from both sides of the fence. That is, both policy owners and policy issuers (agents and sometimes companies) have done some pretty nasty things in order to get some money. Every incident, whether well-publicized or not, has contributed to a large and growing body of laws and regulations at both the state and federal level which regulate the insurance industry and how people benefit from insurance. While many of us have often said, "It's a racket!" as we have grumbled about increasing premiums on our various policies, we don't really know if someone is making a fortune from those premiums or not. Sure, there are high-paid executives, and there are rich agents, but both the executives and the agents are making their money on volume. We don't get upset about the fact that commercial bakeries with stores in hundreds of cities rake in millions of dollars every week because we have an unceasing appetite for bread and pastries. But something may bother us if our neighbor down the street sells insurance. While bakers and bakeries have had their ups and downs, most people don't associate the local bread store with scandal and front-page headlines. Insurance companies, on the other hand, are among the first groups to be villified in any disaster because they immediately start talking about losses and increasing premiums. That is just the way it is. We pay insurance companies to manage our risks for us, and we have to trust that the government is not letting them get away with anything inappropriate. But THEY also have to trust that we are honestly reporting claims. And that is the other side of the coin: you and I, through the policies we pay for, don't just share in the risk, we also share in the benefits from insurance. Many of us have received some sort of benefits from insurance. The more benefits we receive, however, the more money the insurance companies have to pay out for those benefits. And the more they pay out, the more they have to collect (unless their investments prove really profitable, but investment strategies don't always pay off). Fraudulent claims cost the insurance industry millions of dollars every year. The costs are incurred not just from paying benefits, but also from investing claims (both legitimate and illegitimate), prosecuting people for fraud, filing lawsuits to recover benefits, and all the administration which is required to implement those investigations and lawsuits. These expenses are paid for by the premiums people pay for their policies. Nonetheless, insurance is good to have when you can afford it. It's not simply about having peace of mind at night. It's about being prepared for what is LIKELY to happen. If you live in Florida, it's not a matter of IF, but WHEN you will be threatened by a tropical storm, hurricane, or tornado. If you drive a car, it's not a matter of IF, but WHEN you will be hit by someone else, or you will hit another vehicle. Yes, there ARE some drivers who don't suffer accidents, but how many do you know? |
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