Hacker News Reader

Generally agree about InsuranceCos, but I don't think your claim is true about profitability of core insurance operations.

Their combined ratios (insurance payouts + expenses / premiums collected) are closely tracked by investors and if they're creeping up to 100% without a systemic reason that affects all InsuranceCos, they get a lot of scrutiny.

Here's just one lens [0] for home insurance going back to 2004 (~20 years). It appears that the combined ratios were under 100% for ~8 years.

[0] https://www.spglobal.com/marketintelligence/en/news-insights...

> Here's just one lens [0] for home insurance going back to 2004 (~20 years). It appears that the combined ratios were under 100% for ~8 years.

For the other 12 years they were over. 60% of the years were losses.

The average is 101.535 for all years in your source. So over 20 years their costs were $101.53 for every $100 in premiums collected.

I didn't say that they ALWAYS post losses, I said that it is very common, and that insurance premiums are a net money loser for the industry.

This is just another source proving that out, unless I'm missing something?

I'm addressing your premise.

>Selling insurance and paying claims is a sort of loss leader for the insurance industry.

Now you say

> I didn't say that they ALWAYS post losses

And

> that insurance premiums are a net money loser for the industry.

This is circular. As for the article, it shows the context that the last couple years have been exceptional and core operations aren't sustainable.

Your reasoning doesn't explain why these companies are cutting coverage, skyrocketing premiums, and leaving markets. They wouldn't be retrenching if the status quo was absorbing losses.

> In 2023, insurers lost money on homeowners coverage in 18 states, more than a third of the country, according to a New York Times analysis of newly available financial data. That’s up from 12 states five years ago, and eight states in 2013. The result is that insurance companies are raising premiums by as much as 50% or more, cutting back on coverage or leaving entire states altogether. Nationally, over the last decade, insurers paid out more in claims than they received in premiums, according to the ratings firm Moody’s, and those losses are increasing. [0]

[0] https://www.wlrn.org/business/2024-05-27/as-insurers-around-...

The original discussion about insurance companies accepting small underwriting losses to gain investment capital (float) refers to the traditional insurance business model operating under normal conditions. This is different from the current market disruptions we're seeing in specific high-risk regions.

Insurance companies are indeed leaving certain markets and raising premiums dramatically, but this is happening because:

1. Climate Change Risk Unpredictability

* Traditional insurance models rely on being able to predict risk with reasonable accuracy

* Climate change is making weather-related disasters more frequent and severe

* Historical data becomes less reliable for predicting future losses

* This uncertainty makes it impossible to price policies appropriately

2. Regulatory Constraints

* State regulators often limit how much insurers can charge for coverage

* Companies can't price premiums high enough to cover increasing risks

* They're forced to choose between unsustainable losses or market exit

* Political pressure often prevents charging actuarially sound rates

3. Concentration of Risk

* Some areas face multiple overlapping risks (fire, flood, hurricane)

* Large-scale disasters can trigger many claims simultaneously

* This violates the insurance principle of risk diversification

* Even investment returns can't offset such concentrated losses

4. Scale of Potential Losses

* Traditional model accepts small predictable underwriting losses

* Current climate risks create potential for catastrophic losses

* Example: California wildfires can destroy entire communities at once

* No amount of investment income can offset such massive losses

5. Market Structure Issues

* Some markets require insurers to take all risks (can't be selective)

* Cross-subsidization between markets becoming unsustainable

* State-specific regulations creating fragmented markets

* Limited ability to diversify within regulated markets

While the traditional insurance model can handle planned small underwriting losses offset by investment gains, that model breaks down when facing large-scale unpredictable risks that can't be properly priced or diversified. This explains why insurers are withdrawing from certain markets while still operating profitably in others.

> refers to the traditional insurance business model operating under normal conditions. This is different from the current market disruptions we're seeing in specific high-risk regions.

I've yet to see a capital markets discussion with an InsuranceCo where someone says, "Oh! Your combined ratio under normal conditions is at/over 100%. Good job management team!" Please provide some sources supporting combined ratios >= 100% as OK/sustainable, or this will continue to be circular.

> Insurance companies are indeed leaving certain markets and raising premiums dramatically, but this is happening because...

Dude, your #1-5 just listed reasons why the core insurance operations have to be profitable, or they cease operations. That's making my point. You made no reference to their investing activities overcoming losses as you implied. If they can't price risk effectively in their core business "under normal conditions," then they will get competed out of the market.

> I've yet to see a capital markets discussion with an InsuranceCo where someone says, "Oh! Your combined ratio under normal conditions is at/over 100%. Good job management team!" Please provide some sources supporting combined ratios >= 100% as OK/sustainable, or this will continue to be circular.

Dude, your source shows that over a multi-decade time-span the industry loses underwriting money more often than it makes money (12/20 years), and if you tally it out in the long run, they are net negative (101.5 dollars paid per 100 in premium income). https://www.spglobal.com/marketintelligence/en/news-insights...

Of course they aren't going to congratulate themselves on losing money on underwriting in those words. The way you will see it phrased is congratulating themselves on increased premium income from sales, while elsewhere in the report acknowledging underwriting losses. Maintaining the same rate of underwriting loss while increasing sales will also increase the total loss, but it is not at all rare to see an investor report congratulating management on increased sales in a circumstance where a larger loss was made.

> Dude, your #1-5 just listed reasons why the core insurance operations have to be profitable, or they cease operations. That's making my point. You made no reference to their investing activities overcoming losses as you implied. If they can't price risk effectively in their core business "under normal conditions," then they will get competed out of the market.

You asked me to address those specific circumstances, which I noted are largely separated from the aggregate of all circumstances and markets that drive the insurance industry as a whole. You are missing my big point; the insurance industry do not get rich by charging you premiums higher than your claims. Any profits they make are slim, and normally eaten up by losses in the long term (again, see your own source). The insurance operations don't have to be profitable, and they aren't according to both your source and me.

They have to be predictable so that you can price your premiums in a way that the underwriting losses aren't greater than your investment income. Those reasons I listed are what make those policies unpredictable, un-priceable effectively, and therefore not an acceptable way to lose money.

I didn't address the fact that they make their losses back in investments because it was the whole point of my original post, and all of the sourcing that I have done; it is broadly made in the quarterly reports I linked to, as well as the letters to investors from Warren Buffet.

Per your own source and decades of investor documents, the industry posts underwriting losses constantly, and makes their profits by investing the float. It isn't a big secret.

did you mean [(insurance payouts + expenses) / premiums collected] ?

Sure. I don't think people get tripped up on the OoO in context.

no worries, not trying to be pedantic, just wading into new territory with a lot of questions. Sometimes financial equations take unintuitive forms for niche use cases.

Allstate appears to have made a profit for ~14 of the last 15 years.

https://www.macrotrends.net/stocks/charts/ALL/allstate/net-i...

They make a profit on investing the float that offsets their underwriting loss. I never claimed that insurance companies aren't profitable. I said that their insurance is a money loser.

If you look at their financial statements you can see that they have been losing billions on underwriting for years https://www.allstateinvestors.com/static-files/d61a8007-647a...

But... they don't have money to invest without the insurance premiums coming in. My family finances look a lot worse if you exclude interest and investment proceeds at random from the analysis, too.

$10-20B profit annually is not something I'd describe as "in the hole". The "hole" is overflowing with money.

If you keep selling a product for $95 that costs you $100 to deliver you will be "in the hole" on that product line. For Allstate, that product line is insurance.

If you invest that $95, get a $15 dollar return, and then deliver the $100 product, you have made a net profit even though you sold the product for below cost. You are still in the hole for the insurance product no matter how you slice it.

Yes, I get that the insurance product is what allows them to invest the float. But any accountant can tell you that they are in the hole on that product.

They are still selling the product at a loss, even if their time arbitrage lets them make money elsewhere. Its kind of magic in that its a win/win scenario in what looks like a zero sum game. The point is that people think that insurance companies make money off of them paying a premium higher than what they will recover in claims, and saying that insurance is always a bad deal for the consumer. My point is that isn't true. Insurance companies pay out more in underwriting costs than they collect in premiums. Insurance is very frequently and insanely good deal in aggregate.

is it really a float? Im not an accountant, but when I think of float, I think of the balance in an account that regularly clears.

Is it analogous to interest in household checking account where income = bills, or is it analogous to the same household with a large retirement account that sweeps the checking and pays bills.

Maybe another way of asking this is whats the relative size of the interest bearing investments to the annual premium collection.

Can you show me where this is listed in the allstate financial results?

https://www.allstateinvestors.com/static-files/d61a8007-647a...

The float in the insurance industry is simply the term of art for the pool of money from premiums paid that is available for investment. On that particular statement, I would look at page 8. The assets are, more or less, the float which comes pretty directly from the liabilities of unearned premiums and estimated future claim payments in the liabilities.

It is hardly a coincidence that their unearned premiums + claim payment reserve happens to be roughly the amount they have invested ($65b and $66b respectively).

Warren Buffets letters to investors explain the insurance industry, and the float, as a whole pretty well (page 7): https://www.berkshirehathaway.com/letters/2013ltr.pdf

Okay, so if I'm reading this correctly, annual premium income is around $30 billion, annual insurance payouts is also around $30 billion ( cost of administration). Investment assets under management around 66 billion.

This is all right, I still don't see how the insurance business unit add value unless there are profitable years on average.

I'll have to check out the letters, maybe they will explain this.

Edit: Having read that section of the letter, my understanding is the existence of insurance companies relies on the belief that in the long run, the insurance side will not be a loss leader, at least for insurance types without a significant time lag between customer acquisition and insurance payout. For example, operating a "loss leader" could be profitable for something like life insurance where there average claim for a new customer is in the future.

It seems like insurance types where there is no intrinsic time delay between customer acquisition and payout (e.g. auto, home) can not operate this way. That is to say, you cant build up a profitable interest bearing float if average policy payouts are >100% in month 1 of the policy.

Would you agree with this description?

Insurance companies' investments come almost entirely from premiums that customers pay. These premiums show up as liabilities on the balance sheet because they represent future claims the company expects to pay out. Think of it this way: customers are paying now for a service (insurance coverage) they might need later.

Let's use an example: If an insurance company has $66 billion in premiums collected, they know they'll likely need to pay out about $66 billion in claims over the coming years. Instead of letting this money sit idle in a bank account, they invest it.

This is where the two sides of an insurance company come into play:

- The underwriting side (selling insurance policies) collects premiums

- The investment side uses these premiums as capital to make investments

It's similar to a loan system, but with a twist. When customers pay premiums, they're essentially "lending" money to the insurance company. This "loan" only gets "repaid" when the customer files a claim. Meanwhile, the insurance company invests the premium money. While they eventually have to pay out claims (repay the "loan"), they get to keep all the investment profits they made.

This explains why insurance companies often continue selling insurance even if they lose a small amount on the underwriting side - it's like getting a very cheap loan. Historical data shows insurance companies lose about 1.5% per year on underwriting. That's their effective borrowing cost, which is much cheaper than other forms of borrowing.

Why don't they just raise prices to make both underwriting and investments profitable? Because insurance is highly price-competitive. Customers will quickly switch companies for a better rate. If Company A tries to make a 2.5% profit on underwriting, while Company B is willing to lose 2.5%, Company B's prices will be 5% lower - and they'll attract more customers, giving them more premium money to invest.

please see my edit about the relevance of time delay. Im curious what you will say. Using the loan analogy, I understand how a firm can make money on loans with a repayment delay. This doesnt make sense to me if the payout is >100% and the average time delay converges to 0.

No, that's not accurate. The time delay doesn't converge to 0 just because payouts match incoming premiums. Here's why:

Think of it like a water tank: - The tank contains 66B gallons (total liabilities) - 30B gallons flow in annually (new premiums) - 30B gallons flow out annually (claim payments) - The tank stays at 66B gallons (stable liability pool)

Even though the annual inflow equals the outflow (30B), it would still take about 2.2 years to drain the entire tank (66B/30B = 2.2) if you stopped adding new water. This is the average time delay.

The matching of annual inflows and outflows just means the system is in steady state; it doesn't affect the average duration of how long money stays in the system. That duration is determined by: - Total liability pool ($66B) divided by - Annual payout rate ($30B)

Another way to think about it: - Each premium dollar collected today is promised against future claims - Those future claims are spread out over the next several years - Even as old claims are paid, new premiums create new future obligations - The ratio of total obligations to annual payments (66/30) determines the average delay

So while the annual cash flows may match, the time delay is a structural feature of how insurance obligations are spread out over time. The matching of annual inflows and outflows maintains the system's stability but doesn't eliminate the time delay inherent in the insurance model.

It is intrinsic to the nature of insurance that there is a time delay. Even if the insured were to suffer a loss on the same day that they paid their premium, there will still be a delay. Even the most efficient, benevolent insurance operation cannot process a claim, value a loss, and settle the claim within a day.

I get how you can have a profitable steady state in with equal inflow and outflows given a surplus tank.

I get how even an immediate claim takes time to settle.

Would you agree that this puts an upper limit on the loss they can run? If more aggregate auto claims are submitted than premiums paid in a day, you can only make interest on they delay duration. If payout delay is say 3 months, annual interest is 4%, you break even at a 1% loss on premiums, right?

If you are consistently drawing down your float to pay claims instead of adding to it, you are better off leaving the auto insurance industry and simply operating an equity investment firm.

> Would you agree that this puts an upper limit on the loss they can run? If more aggregate auto claims are submitted than premiums paid in a day, you can only make interest on they delay duration. If payout delay is say 3 months, annual interest is 4%, you break even at a 1% loss on premiums, right?

Of course there is an upper limit on losses they can run. The upper limit is base on their investment returns and the time frame. The time frame is longer than you think. Based on a quick run of the numbers it is measured in years.

> If you are consistently drawing down your float to pay claims instead of adding to it, you are better off leaving the auto insurance industry and simply operating an equity investment firm.

They are continually replenishing the float at the same time. The whole point is that they are operating an equity investment firm, except the investment capital comes from a revolving pool of insurance premiums instead of some other pool of money.

There's something I'm still not getting. Car insurance should not have a significant lag because the probability of claim is not related to the date of policy. I'm just as likely to get in an accident on day 1 of my policy as day 1,000.

If daily claims meet or exceed the daily premium, the only time available to earn interest is between premium receipt and claim payment.

Imagine founding an insurance company and on day one you receive $100 in premiums and $100 in claims.

> My point is that isn't true.

But it is still true, unless I'm forbidden from making my own investments.

That's for the corporation as a whole and counts the net of investment profits and insurance losses. If you open their earnings release, you can see combined ratios over 100%, indicating that the total cost of operating the insurance is negative, but this is offset by investment profits (as the original commenter mentioned - they make money off the float).

Can you provide some sources on this? Genuinely interested to learn more.

Their financial reports have the numbers plain as day: https://www.allstateinvestors.com/static-files/d61a8007-647a...

Page 2 has their premiums collected and their claims paid. They are down 5 billion in 2022 and 2023. Haven't seen the full results for 2024 yet.

For an explanation of why, Warren Buffets letters to investors explain the insurance industry as a whole pretty well (page 7): https://www.berkshirehathaway.com/letters/2013ltr.pdf

Pretty consistently, the industry as a whole loses money on policies.

The insurer losing money insuring your does not mean it's a good deal on net.

I pay $100, they pay out $90 on my behalf in that time period, total cost to them is $110 because overhead. That it cost them $110 and I only paid $100 doesn't mean I'm not losing $10.

Of course they actually make $111 because they invested my money but that's beside the point.

Fascinating. Thanks for sharing this.