Insurance is a Commodity: A Continuing Series

I was reminded today of how many insurance companies actually make a profit: Premium Financing.

The idea is that an insurer accepts some credit risk from the policyholder by not getting all the money up front but charges some insane interest rate on the loan (like, credit card interest insane).

The published rates are therefore cheap, generating much less money than would actually be needed to run the company. Insurance regulators can cheerfully pat themselves on the back, though, because rates are low.

Customers are obviously fine because, like with mobile phone plans, the deal appeals to their huge discount rates.

The trick, of course, is that because this is the only profit these companies ever make, they have to shield it from everyone, particularly reinsurers. Imagine a Joint Venture where the costs are split 50/50 but the revenue is split 60/40. Big problem.

And because most of the companies that work this way are small (for some reason), they are heavily reliant on reinsurance. So they desperately need this service (reinsurance), but simply cannot afford to pay full price for it.

These clients are the biggest pain in the ass. Honestly.

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This entry was posted in economics, insurance, insurance business strategy. Bookmark the permalink.

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