Hacker News Reader

Comment by koheripbal | Hacker News Reader

Broadly, they make money by doing statistical analysis on risk. If they can price the risk more accurately than their competition, then they can capture more premiums for less claim risk.

Maybe it's a function of zip code, sex, age, profession, hobby, weight, etc... while another company will add a question about exercise level and put different multipliers on each of those.

They are constantly refining their statistical models to gain an pricing advantage over the competition without taking on more undo risk.

This applies to all kinds of insurance.

Combating fraud is ALSO a big thing. So they often share lists of customers they believe have defrauded their policies in the past, and are starting to use AI to find which patterns reduce the risk most, as well as getting around certain metrics they aren't allowed to ask about - like ethnicity.

View on HN

I'm an actuary and data scientist at a major life insurance company. It depends a lot on the product and business line. For employer-sponsored coverage, zipcode, age, sex, industry, salary, and collar (white/blue) are the major underwriting factors that determine what your employer pays in premium.

For individual life products (term, whole life, etc), it's much less about gaining an advantage from an underwriting perspective. A lot of it is marketing, product design, and investment strategies. State farm's products are pretty expensive compared to the rest of the industry, but their "one-stop-shop" approach and bundling discounts have given them a pretty good marketing niche. Other carriers have their own niches, e.g. using tax-havens to reduce capital requirements. Some invested in very long duration bonds at the right time, and are reaping the benefit of higher yields (on reserves aka float) compared to their peers.

And if the article is still down, the answer to the question of how life insurance companies make money is underwriting profits (charging more than they pay out in claims) and investing in high-quality fixed income investments. Sometimes less scrupulous companies (often owned by private equity firms) create tax arbitrages via offshore havens and tax loopholes.

The tax loopholes only help if you're profitable.

Yes risk is attributed to premiums. Yet I talked to an employee at a large US insurance firm and he said they take a loss with premiums. All the premiums do is go into marketing and advertising. They make their money by investing. So basically insurance firms are hedge funds with cash flow.

I think you misinterpreted what was said. A company taking an underwriting loss like that would be shut down by regulators in a heartbeat. There are very large regulatory capital requirements in life insurance, which is why you don't see new entrants into the market.

I'd interpret "they take a loss with premiums" in the parent comment as meaning the nominal value of expected claims exceeds the nominal value of premium. And that's very commonly the case for interest-sensitive life and annuities. It's equivalent to the expected IRR from the policyholder's perspective being greater than 0, and it would be hard to justify selling an investment-oriented product with a negative expected return.

Or consider a SPIA with a return of premium guarantee. The total claim payments will always be greater than or equal to premium on a nominal basis, so investment income necessarily funds over 100% of the profit.

I'm dubious about that claim. There are laws that require capital-cash requirements to cover claims. Maybe they put their premiums into "almost-cash" securities, but I doubt they are gambling with the money.

It's possible they are buying other derivatives to reduce their risk - or maybe other types of CDO's, etc... But if you're suggesting they are stock-picking with premiums - I find that very very hard to believe. ...and it's likely illegal.

Reply on news.ycombinator.com