Insurer vs Insured – Who Does the Insurance Policy Benefit?

I recently attended an event for CFO’s and one of the sessions was about insurance and who is the real beneficiary of an insurance policy – the insurer or the insured.  For the most part insurance companies are for-profit entities, many publicly traded.  They have shareholders to answer to and quarterly results to meet.  The insurance company has the added advantage of writing the insurance policy, and yes, that 800 page policy is in fact a contract.  Add these things up and it is clear that the intention of the insurance company is to make money and be the beneficiary of the insurance policy.  On the micro they may lose money on a policy or two but on the macro they hope to collect more premium dollars than they pay out in claims.

How do insurance companies make money?  The most obvious way is to insure the entities that they have deemed the safest or least risky and charge the maximum amount of premium that the market will allow.  The problem with this is that all insurers want those same types of business so the premium is driven down and an insurer may not feel the premium is adequate for the risk.  In addition, there are financial requirements set forth by regulators and rating agencies such as AM Best that insurance companies need to be mindful of.  Because there are so many insurance companies it is hard for an insurance company to control premium, the market dictates what the premium should be.  There are exceptions, such as high hazard industries or geographies where there are not as many insurance companies willing to insure, but for the most part there is enough competition that premium can be driven down.

Okay, so competition is fierce and as a result premiums are being driven down so why aren’t insurance companies going out of business?  The answer, and what a consumer should be most concerned about, is that all insurance is not equal.  A property policy from insurance company A is not necessarily the same as the insurance policy from company B and this is how companies can make money.  That insurance policy is hundreds of pages for a reason, there is a lot of information in it.  What insureds need to know is not what is included but what is excluded and there is a whole section on things that are excluded.  In addition, there are “endorsements” that exclude coverage.  There is another section called definitions and the objective here is to clarify what something is and that definition may not align with your definition.  All of these different things are used by the insurance company to not pay claims.  How crazy is this, there is a certain way claims need to be reported and if these procedures are not followed the insurance company can decline your otherwise covered claim.

An insurance policy is a unilateral contract.  The insurance company has the enforceable promise and the insured simply needs to pay a premium to keep that contract in place.  This allows the insurance carrier to set the rules and tilt those rules in their favor.  Many times I find the insured does not know the rules because their broker never told them the rules.  The broker told them that they saved them X amount of dollars, but really that was the market that saved them money.  A broker should be telling their clients where they eliminated some of the “loopholes” that insurers use to get out of claims and where these loopholes might still exist.  If a broker isn’t telling you what loopholes were eliminated, what loopholes could be eliminated at an additional cost, and what can’t be eliminated how can an insured properly estimate the financial risk that has been transferred off of one’s balance sheet?  Even scarier, what risks are you self-insuring that you thought were covered by your insurance policy?

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