Is it true that whatever insurance we get in the market is generally overpriced?
Total Comments: 24
Posted: Wed Jan 20, 2010 05:02 pm Post Subject:
A few years ago, Metropolitan Life learned that if you "overprice" a product because of the color of someone's skin, you spend lots of time in court and end up paying something in the 8-figure range to make the problem go away.
Posted: Fri Jan 22, 2010 04:41 am Post Subject:
Here's a great moment for an economics lesson. There's a market for insurance, just like there is a market for anything else. There's a cost associated with insuring risks and that's the driving factor behind an insurance company's willingness to offer a product at a given price. There's also a willingness to accept the cost of insuring risks based on expected utility from having the risk covered, and this drives consumer receptivity to buying insurance at a given price.
Now, something truly interesting goes on in the insurance market that we don't usually get to see in all markets for all goods. The shear quantity of suppliers allows for a lot of discrete numbers when it comes to offering price.
For those who have made it through even a basic economics class, think back to the very basic supply and demand schedule, remember how at the left of the graph you had a supply schedule (with it's positive slope starting somewhere close to zero) and a demand schedule (with it's negative slope beginning at a point much higher on the y axis) and these two lines were no where near each other. This representation accounts for the people who would pay nearly anything for the good and the suppliers who can produce it for almost nothing so they could afford to sell it for next to nothing. Remember supply and demand schedules are the aggregate of the suppliers and demanders for the entire market for a given good.
If you didn't fall asleep, you might remember a seemingly insignificant concept known as "gains from trade." This idea is hugely important to out discussion. Gains from trade represent the huge discount demanders who are furthest left of the equilibrium feel they get when a given good sells at the market price, and the huge mark up suppliers who are furthest left of the equilibrium feel they are getting.
Now keep in mind that there is a group of people who are to the right of the equilibrium, both demanders and suppliers. Demanders at this point view the market price as over priced for the given good, and suppliers do not have the ability to produce (offer) the good at that price.
Now, there's a lot to be said about what goes into developing those supply and demand curves, but it's a lot more typing that I don't have time for at the moment. The simplest way to end this is to swing back to the suggestion that overpriced is a relative term. But the core point here is that with insurance, the suppliers will offer the product at their available price (they are price makers not necessarily price takers, which is the generally accepted view about those who produce a given good in a market economy). This means at times, suppliers of a specific insurance product for a particular situations, who don't really want the business anyway, often end up with demanders who look at the price and feel it is overpriced. Now when it comes to government involvement with certain goods, take for example mandatory car insurance, this creates a degree of coercion that operates contra to market economies.
Is insurance overpriced? No because utility is not universally the same for every person. With that in mind, there is no such thing as a good being overpriced in market economics, just the perception of some to consider it that way.
Posted: Sat Jan 23, 2010 05:17 am Post Subject:
Then again, on the other hand. I've never seen anyone receive a check after a loved one died who said, "Dang!! this is sure great, but I think I paid far too much money it."
Posted: Mon Apr 05, 2010 04:24 pm Post Subject:
I've been in the same situation a number of times, feeling that I've paid too much. But, then again, "too much" is such a vague term. It's nearly impossible to define. It's reminiscent of the price guaging at the pump...
Great information, all of you!
Posted: Sun Apr 18, 2010 04:45 am Post Subject:
Just to add my two-cents' worth: A wise, and wealthy, man once said to me, "Price is only an issue in the absence of value."
You cannot disagree with that, and expect to be taken seriously.
All of us, even as agents, complain about the cost of our own insurances, at least some of it. But the fact of the matter is, no matter how much you believe it should cost, compared to what you're paying for it, the moment you have a loss, only to realize that you cancelled the insurance yesterday because it was "too expensive" or "overpriced", you'll wish you could get it back.
Politicians have even proposed cockamamie schemes that would actually permit people to drive around without auto insurance, and allow them to apply for coverage AFTER they have an accident.
Want to discuss "overpriced" in that scenario?
"How much damage did you cause?" the underwriter asks.
"Oh, it wasn't very much, I think it was only about $5,000," the poor uninsured driver replies, "So how much will the insurance cost?"
"Well, give me a sec . . . that'll be $6,500."
"But I told you, the damage was only $5,000."
"Right. How do you expect us to make the 30% profit you thought was too much two months ago when your premium was $1,000 per year?"
Other folks have a different attitude: My home and it's contents are valued at $500,000. My annual premium is $1,000. If I live in that home for 25 years, pay the same $1,000 or so per year, and have a $25,000 loss in that 25th year, I sort of break even. But in all those other years, at least I had the peace of mind knowing that if something DID happen, it would have been covered."
It's a love-hate relationship. Always has been, always will be. Like other things in life, with most insurance, you usually get what you pay for, but with(out) insurance, when you don't pay for it, you (or someone else) will get even less.
Life with insurance is good. But it's even better when you never have a claim.
What truly amazes me, however, is that these same people who rant and rave about insurance being overpriced . . . they're the same ones who continually reelect the same politicians to state and federal offices who vote for higher taxes, higher pay for public employees, higher pension benefits for those employees, like to tell us what a great job they're doing, and refuse to cut spending, eliminate useless employees and agencies, could care less about fraud in government, and now want to tell health insurance companies (at least beginning in 2014, perhaps) they must do business with everyone who comes their way.
Wait till then, and then see what they have to say!
As my Greek professor told our class in 1984, "You can't teach a pig Greek . . . it only frustrates the teacher and irritates the pig."
Posted: Fri May 07, 2010 01:22 pm Post Subject:
In an open competitive market, Insurers can’t afford to overprice!
Posted: Fri May 07, 2010 02:20 pm Post Subject:
Many do all the time. They're known as "mutual" insurance companies. They overcharge their policyholders so they can give them a dividend check every year. Some have a proud history of 75 years of uninterrupted dividends to their insureds.
Interpret that as: We've been overcharging our clients for 75 years.
Posted: Wed May 26, 2010 05:05 pm Post Subject:
Really? I mean really?
That has to be one of the most asinine comments you've ever made here, and you've had your fair share of blunders.
In the past I've looked at a lot of the comments you've made with innacuracies as relatively innocent little mistakes where you've taken way too much of a matter-of-fact approach to certain topics.
Some of the suggestions you've made concerning how an agent should properly go about a situation have left me questioning whether you really practice in the insurance or financial advising role at all, as they've seemed largely impractical.
You've gone around touting the book Die Broke which is largely archaic and useless information. I remember a post from when you first started showing up around here when you referenced Suze Orman as a financial expert.
And now you've committed the little blade of grass blowing in the wind trend of let's talk about mutual insurance companies overcharging to refund premium because that's my literal-inside the box read of the legal definition of a dividend so it must--in fact without any room for possible interpretation--be the way it works.
The link you post to an e-mail in all of your posts states you live, breathe, and teach insurance. I sure hope you don't have many students or the state of Califonia is going to have a lot of poorly insurance educated individuals running around.
The former NY state insurance commiossioner once stated he wouldn't see why anyone would do business with a company that wasn't a mutual. I suppose he's just a foolish for taking such a one sided approach as you on a topic such as this.
And by the way, many mutuals have proudly talked about their dividend paying history as going way beyond 75 years there chief.
Posted: Wed May 26, 2010 11:31 pm Post Subject:
Sorry I touched an open nerve.
How do you define dividend?
I don't have a problem with mutual insurers at all. But a dividend is a refund of excess premiums paid, plain and simple. If their premiums were lower they would probably not be paid, or not be paid as often, or would be lower than they are.
And as many mutuals as there are, why is it that few (none?) offer participating UL policies . . . the ones they seem to be so heavily promoting?
Posted: Thu May 27, 2010 03:15 am Post Subject:
But a dividend is a refund of excess premiums paid, plain and simple.
No, a dividend is a return of premium; this has huge tax benefits from an accounting point of view. It's entirely possible that a policy could have no premium basis and still receive a dividend.
Premiums don't exist because insurance companies overcharge for their products, they exist because insurance companies have profits. The same is true of non mutual insurance companies, and other corporations.
Are you going to tell me that the dividends my credit union pays me is a result of their either not paying me enough interest on my savings account, or overcharging the members who have loans?
What does paying dividends on Universal Life insurance have to do with any of this, and what would that prove with respect to your claim that mutuals overcharge for their premiums so that they can pay dividends?
On top of that, what major mutual life insurer is pushing Universal Life insurance?
But on the topic of mutuals and Universal Life, I got an e-mail the other week from one of the major mutuals telling me that due to better than expected mortality experience they are reducing the mortality (cost of insurance) charge on all of their future and in force universal life insurance policies issued under the 2001 CSO tables.
Now, also keep in mind that when a dividend is paid on a product like Whole Life insurance where there is a guaranteed rate of return, part of the dividend is calculated on investment performance that is better than that guaranteed rate of return (read has nothing to do with premiums collected). All of the major mutuals make a big deal out of the investment performance of their general accounts whenever they've achieved something superlative. In 2006 or 2007 (can't remember which) Northwestern Mutual was making a huge deal out of their year end (from the prior year) investment performance, which was near 20%. They even had a spot on CNBC to talk about it. In 2008 The Guardian moved it's general account entirely out of stocks and avoided most of the losses associated with the correction that took place later in the year, their press department was going wild.
Both Massmutual and Northwestern Mutual have issued participating disability insurance policies. Both generally have products that run cheaper than Berkshire/Guardian which does not issue participating disability insurance.
On the Property and Casualty side, a colleague of mine has home owners and car insurance through Amica, and recently made claim on his homeowners, contractor told him he loved working with Amica because they don't play the games a lot of the other companies he's dealt with do, and they don't try to cut corners in paying for repairs.
Posted: Wed Jan 20, 2010 05:02 pm Post Subject:
A few years ago, Metropolitan Life learned that if you "overprice" a product because of the color of someone's skin, you spend lots of time in court and end up paying something in the 8-figure range to make the problem go away.
Posted: Fri Jan 22, 2010 04:41 am Post Subject:
Here's a great moment for an economics lesson. There's a market for insurance, just like there is a market for anything else. There's a cost associated with insuring risks and that's the driving factor behind an insurance company's willingness to offer a product at a given price. There's also a willingness to accept the cost of insuring risks based on expected utility from having the risk covered, and this drives consumer receptivity to buying insurance at a given price.
Now, something truly interesting goes on in the insurance market that we don't usually get to see in all markets for all goods. The shear quantity of suppliers allows for a lot of discrete numbers when it comes to offering price.
For those who have made it through even a basic economics class, think back to the very basic supply and demand schedule, remember how at the left of the graph you had a supply schedule (with it's positive slope starting somewhere close to zero) and a demand schedule (with it's negative slope beginning at a point much higher on the y axis) and these two lines were no where near each other. This representation accounts for the people who would pay nearly anything for the good and the suppliers who can produce it for almost nothing so they could afford to sell it for next to nothing. Remember supply and demand schedules are the aggregate of the suppliers and demanders for the entire market for a given good.
If you didn't fall asleep, you might remember a seemingly insignificant concept known as "gains from trade." This idea is hugely important to out discussion. Gains from trade represent the huge discount demanders who are furthest left of the equilibrium feel they get when a given good sells at the market price, and the huge mark up suppliers who are furthest left of the equilibrium feel they are getting.
Now keep in mind that there is a group of people who are to the right of the equilibrium, both demanders and suppliers. Demanders at this point view the market price as over priced for the given good, and suppliers do not have the ability to produce (offer) the good at that price.
Now, there's a lot to be said about what goes into developing those supply and demand curves, but it's a lot more typing that I don't have time for at the moment. The simplest way to end this is to swing back to the suggestion that overpriced is a relative term. But the core point here is that with insurance, the suppliers will offer the product at their available price (they are price makers not necessarily price takers, which is the generally accepted view about those who produce a given good in a market economy). This means at times, suppliers of a specific insurance product for a particular situations, who don't really want the business anyway, often end up with demanders who look at the price and feel it is overpriced. Now when it comes to government involvement with certain goods, take for example mandatory car insurance, this creates a degree of coercion that operates contra to market economies.
Is insurance overpriced? No because utility is not universally the same for every person. With that in mind, there is no such thing as a good being overpriced in market economics, just the perception of some to consider it that way.
Posted: Sat Jan 23, 2010 05:17 am Post Subject:
Then again, on the other hand. I've never seen anyone receive a check after a loved one died who said, "Dang!! this is sure great, but I think I paid far too much money it."
Posted: Mon Apr 05, 2010 04:24 pm Post Subject:
I've been in the same situation a number of times, feeling that I've paid too much. But, then again, "too much" is such a vague term. It's nearly impossible to define. It's reminiscent of the price guaging at the pump...
Great information, all of you!
Posted: Sun Apr 18, 2010 04:45 am Post Subject:
Just to add my two-cents' worth: A wise, and wealthy, man once said to me, "Price is only an issue in the absence of value."
You cannot disagree with that, and expect to be taken seriously.
All of us, even as agents, complain about the cost of our own insurances, at least some of it. But the fact of the matter is, no matter how much you believe it should cost, compared to what you're paying for it, the moment you have a loss, only to realize that you cancelled the insurance yesterday because it was "too expensive" or "overpriced", you'll wish you could get it back.
Politicians have even proposed cockamamie schemes that would actually permit people to drive around without auto insurance, and allow them to apply for coverage AFTER they have an accident.
Want to discuss "overpriced" in that scenario?
"How much damage did you cause?" the underwriter asks.
"Oh, it wasn't very much, I think it was only about $5,000," the poor uninsured driver replies, "So how much will the insurance cost?"
"Well, give me a sec . . . that'll be $6,500."
"But I told you, the damage was only $5,000."
"Right. How do you expect us to make the 30% profit you thought was too much two months ago when your premium was $1,000 per year?"
Other folks have a different attitude: My home and it's contents are valued at $500,000. My annual premium is $1,000. If I live in that home for 25 years, pay the same $1,000 or so per year, and have a $25,000 loss in that 25th year, I sort of break even. But in all those other years, at least I had the peace of mind knowing that if something DID happen, it would have been covered."
It's a love-hate relationship. Always has been, always will be. Like other things in life, with most insurance, you usually get what you pay for, but with(out) insurance, when you don't pay for it, you (or someone else) will get even less.
Life with insurance is good. But it's even better when you never have a claim.
What truly amazes me, however, is that these same people who rant and rave about insurance being overpriced . . . they're the same ones who continually reelect the same politicians to state and federal offices who vote for higher taxes, higher pay for public employees, higher pension benefits for those employees, like to tell us what a great job they're doing, and refuse to cut spending, eliminate useless employees and agencies, could care less about fraud in government, and now want to tell health insurance companies (at least beginning in 2014, perhaps) they must do business with everyone who comes their way.
Wait till then, and then see what they have to say!
As my Greek professor told our class in 1984, "You can't teach a pig Greek . . . it only frustrates the teacher and irritates the pig."
Posted: Fri May 07, 2010 01:22 pm Post Subject:
In an open competitive market, Insurers can’t afford to overprice!
Posted: Fri May 07, 2010 02:20 pm Post Subject:
Many do all the time. They're known as "mutual" insurance companies. They overcharge their policyholders so they can give them a dividend check every year. Some have a proud history of 75 years of uninterrupted dividends to their insureds.
Interpret that as: We've been overcharging our clients for 75 years.
Posted: Wed May 26, 2010 05:05 pm Post Subject:
Really? I mean really?
That has to be one of the most asinine comments you've ever made here, and you've had your fair share of blunders.
In the past I've looked at a lot of the comments you've made with innacuracies as relatively innocent little mistakes where you've taken way too much of a matter-of-fact approach to certain topics.
Some of the suggestions you've made concerning how an agent should properly go about a situation have left me questioning whether you really practice in the insurance or financial advising role at all, as they've seemed largely impractical.
You've gone around touting the book Die Broke which is largely archaic and useless information. I remember a post from when you first started showing up around here when you referenced Suze Orman as a financial expert.
And now you've committed the little blade of grass blowing in the wind trend of let's talk about mutual insurance companies overcharging to refund premium because that's my literal-inside the box read of the legal definition of a dividend so it must--in fact without any room for possible interpretation--be the way it works.
The link you post to an e-mail in all of your posts states you live, breathe, and teach insurance. I sure hope you don't have many students or the state of Califonia is going to have a lot of poorly insurance educated individuals running around.
The former NY state insurance commiossioner once stated he wouldn't see why anyone would do business with a company that wasn't a mutual. I suppose he's just a foolish for taking such a one sided approach as you on a topic such as this.
And by the way, many mutuals have proudly talked about their dividend paying history as going way beyond 75 years there chief.
Posted: Wed May 26, 2010 11:31 pm Post Subject:
Sorry I touched an open nerve.
How do you define dividend?
I don't have a problem with mutual insurers at all. But a dividend is a refund of excess premiums paid, plain and simple. If their premiums were lower they would probably not be paid, or not be paid as often, or would be lower than they are.
And as many mutuals as there are, why is it that few (none?) offer participating UL policies . . . the ones they seem to be so heavily promoting?
Posted: Thu May 27, 2010 03:15 am Post Subject:
But a dividend is a refund of excess premiums paid, plain and simple.
No, a dividend is a return of premium; this has huge tax benefits from an accounting point of view. It's entirely possible that a policy could have no premium basis and still receive a dividend.
Premiums don't exist because insurance companies overcharge for their products, they exist because insurance companies have profits. The same is true of non mutual insurance companies, and other corporations.
Are you going to tell me that the dividends my credit union pays me is a result of their either not paying me enough interest on my savings account, or overcharging the members who have loans?
What does paying dividends on Universal Life insurance have to do with any of this, and what would that prove with respect to your claim that mutuals overcharge for their premiums so that they can pay dividends?
On top of that, what major mutual life insurer is pushing Universal Life insurance?
But on the topic of mutuals and Universal Life, I got an e-mail the other week from one of the major mutuals telling me that due to better than expected mortality experience they are reducing the mortality (cost of insurance) charge on all of their future and in force universal life insurance policies issued under the 2001 CSO tables.
Now, also keep in mind that when a dividend is paid on a product like Whole Life insurance where there is a guaranteed rate of return, part of the dividend is calculated on investment performance that is better than that guaranteed rate of return (read has nothing to do with premiums collected). All of the major mutuals make a big deal out of the investment performance of their general accounts whenever they've achieved something superlative. In 2006 or 2007 (can't remember which) Northwestern Mutual was making a huge deal out of their year end (from the prior year) investment performance, which was near 20%. They even had a spot on CNBC to talk about it. In 2008 The Guardian moved it's general account entirely out of stocks and avoided most of the losses associated with the correction that took place later in the year, their press department was going wild.
Both Massmutual and Northwestern Mutual have issued participating disability insurance policies. Both generally have products that run cheaper than Berkshire/Guardian which does not issue participating disability insurance.
On the Property and Casualty side, a colleague of mine has home owners and car insurance through Amica, and recently made claim on his homeowners, contractor told him he loved working with Amica because they don't play the games a lot of the other companies he's dealt with do, and they don't try to cut corners in paying for repairs.
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