Blog Entry

Where has all the money gone?

Posted on: September 13, 2008 7:54 am
Edited on: September 13, 2008 8:58 am
   So I sit here and worry about those that have been affected by the recent hurricanes. I listen to the analysts and the government officials as they talk about dollar amount to be assessed to the damage and how the insurance companies are going to take a pounding. People are talking about how claims will not be paid because the insurance companies simply will not have the resources.
   This made me begin to examine my own situation and what would happen if my homes were suddenly wiped out by mother nature. It made me wonder how much would it cost me to replace. Would I be able to lean on my insurance company or would I walk through the rubble only to find out they did not have the money to pay the claims. So I did some simple math to see how much I had paid out over the last 25 years, comparing that to how much I had put in to the insurance company in claims. So here is the breakdown and it can be used for almost all of the 50 million homes in the United States.
   My annual premiums between the two homes are $2650. So for the sake of argument I will break it down to about $1200 a year per home. So I thought that was pretty reasonable considering the value of my homes and they are both insured for a little more than there value should they need to be replaced. Now I tried to put a claim in for some minor water damage to my Florida home that occurred when Fay decided to rent space in the state for more than week. The total damage was about $10K. The claim is still pending. so in the 25 years I have been a homeowner I have paid out over $60K in premiums and have still not yet received any thing as far as a claim. Well that is not to bad I guess, so that leaves some reserve for the insurance companies RIGHT?
   So I then decided to see just how much reserve they had. There are about 50 million homes in the United States and the average premium is about $1100. Sound reasonable right? So lets do the math. That would be just under a $100 bucks a month times 50 million homes. So that is 4.8 BILLION dollars a month.Well that is just about the amount that south florida  had in damage for the last category 4 that blew through. Now I do not want to complicate things to much by adding the interest that the insurance companies make on that but lets just say they get a minimal amount, like what you or I would get in a SAVINGS account. Now when we add that to the annual premiums paid out by WE the home owners, we are talking about over $60 BILLION dollars. Now I realize that I have not been in school since the late 70's and there is a NEW MATH, but that dollar amount is more than the total amount of storm damage of all the storms in the past 10 years. Hurricane Katrina was responsible for about $30 Billion in damages.
   So to surmise, they have brought in $60 BILLION a year for the last 10 years and have paid out about $65 BILLION in the last ten years. So I am asking the public to help me with the math. How do they not have the reserve to pay for the claims people have. Hard working people who pay for insurance so they do not lose everything that they have worked their whole lives for. How can they claim they do not have the money? The insurance companies have made over $750 BILLION dollars including interest in the last 10 years and have paid out less than ten percent of that.
   Who ever believes that we as a country do not need reform is not thinking. Imagine if we added the dollar amounts for all the automobiles insured in this country. I have had car insurance for over 30 years and NEVER had a claim. Who is responsible for this and how does it get FIXED. Keep in mind that this has nothing to do with the CORPORATE insurance dollars spent to insure any buildings other than HOMES. Also keep in mind that the housing market was slightly smaller ten years ago but the numbers still hold true if you add in inflation.

Since: Mar 27, 2008
Posted on: September 19, 2008 11:57 am

Where has all the money gone?

Hey Sad I found myself thinking about the same thing when it was unclear which way Ike was headed. I thought to myself "Am I even covered for this?" "What if were not?" I talked to all of my friends and family about the what ifs and it is pretty scary. We really dodged a bullet over here buddy. I can tell you this, insurance companies are the worst when it comes to payouts. All of these topics have already been addressed in your blog. When it is all said and done the question left unanswered is "where did the money go?" I would like to hear from someone who works for the insurance company to hear what they have to say. Peace Sad.  

Since: Nov 4, 2007
Posted on: September 14, 2008 8:57 pm

Where has all the money gone?

Sorry to be so late responding but dealing with the results of last week's mess from Gustave. Hope this still gets read.

Great topic to discuss and very impressive comment by Yank as a former employee of the biz, interesting perspective.

One thing I think we over look though. Insurance in general has developed in a non-sensical direction. It is supposed to be a protection against severe financial set backs and was never meant to be means of eliminating all risks from life. For example, i have heard friends brag that they have so much life insurance that if they die their family will never have to want for anything again. Life insurance is supposed to be a replacement for lost income, not a means to improve lifestyle or a way to deal with the grief of the loss of a loved one.

In the same way, I have witnessed people almost hoping a storm would come our way because their plan is to evacuate for a few days of paid time off while the storm passes and then remodel with the insurance dollars. I understand the concept of some things are not replaceable all too well as I have split up the pocessions I have from our parents with my 3 sisters who lost everything in Katrina a while back. The point I am making is that years ago, people didn't carry enough insurance to upgrade their house in case of a diaster. We shouldn't be insuring home for replacement value but real value, i.e., how much could you have gotten for the property that yu lost the month before the event.

Just like as in healthcare premiums that everyone thing is too high, the money went to the policy holders who submitted claims. No one could love a father more than I loved mine, but when a 77 yr old man who has already beat throat cancer once qualifies for a quadruple bypass needed to prepare him for throat surgery at a cost of about $250K, no one needs to ask where the money went. I'm not trying to make a case for letting people do without healthcare because it's too expensive or let people live without comfort because a storm hit. What I am saying is that in the entire history on mankind except for the last 20-30 years, when something bad happened, the people it happened to had to suffer some portion of the loss and their was no expectation that they wouldn't. If we want premiums to be more reasonable, we need to be more reasonable in our expectations of what insurance was meant to do.

Thanks for topic. Enjoyed everybodiies' comments and I hope I have now offened anyone as that was never my intention.

Bet regards! 

Since: Mar 20, 2008
Posted on: September 13, 2008 10:33 pm

Where has all the money gone?

I had an Aunt who worked most of her adult life in the Insurance business. I hate to generalize, but one of the few professions that I think is more crooked than politics is insurance. You have to have it, by law in my state to drive or to have a mortgage on your home. Yourrates never decrease for being a good customer, but they certainly increase if you have a claim. Have just one more claim than is profitable and you get canceled. Captive audience with on higher power to answer to(unless you consider those politicians they spend millions of dollars lobbying a higher power.) Can't live with it, can't live without it, so what are you gonna do.

Since: Jan 17, 2008
Posted on: September 13, 2008 11:26 am

Where has all the money gone?

Thanks sadur.

One thing I left out about the reserves is that I thought many would figure out I want to expand on. Many companies set these reserves for future losses too low to increase the profits and therefore increase the dividends, leading to higher stock prices.

Years ago a very high ranking official at a Huge Company lost his job when his remarks about how a pending Hurricane would allow the Company to increase premiums became public. Even his father who ran the Company could nor would do nothing to save his job.

Since: Mar 24, 2007
Posted on: September 13, 2008 11:03 am

Where has all the money gone?

Yank I knew this would give you something to sink your teeth into. Thank you for the explanation. i will do a little more research and get back to you.

Since: Jan 17, 2008
Posted on: September 13, 2008 10:56 am

Where has all the money gone?

I was trying to decide if I should try and explain "where the money goes" Having been a long time employee of various size companies in the Industry. I will give it a go. Never thought I would be defending some of the idiots I have worked for.

1 The Companies do not keep large cash sums in any bank. They invest it. When the markets take a beating, they will lose money no matter how much premium they take in. The Sub Prime Mortgage crisis has hurt them badly.

2 You are forgetting the salaries of the everyday employees of the company. The adjusters, clerks, typists. IT people, underwriters and many others. I am not talking about the overpaid top execs which all industries seem to have , but the everyday folk. They pay commissions of 15-17% to the brokers or agents who placed the business with them.

3 All the other claims paid out under the Homeowners Policies. The fires and robberies. The lawsuits against homeowners from people who slip and fall and whose dog bite someone etc. It can and usually will cost more to pay the lawyers to defend one of them than a few years worth of premium not taking into account the money the "victim" gets. Let's not forget all the fraud that goes on. You all have heard or know of someone who has lied to an Insurance Company to cover the deductable on a loss or worse.

4 Companies are required to have "Reserves" for losses. This does not mean cash on hand as I wrote earlier. The amount of reserves they set for Future losses that have not yet been incurred effects the companies profit and therefore the stock price. More profit means higher price and higher dividends paid to the stockholders. The large companies are all listed on the Stock Exchanges with many pension funds, mutual funds etc. as investors.  Just think of the effects of a failure of a major company on the economy in general.

5 Someone mentioned all the other types of Insurance  that are sold and they make money on. You would be shocked to learn how much money has been lost over the years on some of those policies by companies. You have all seen those lawyers claiming the Billions of Dollars won by some law firms just for Asbestos Claims. Do you think the thousands of dollars paid in the 1940's for policies actually has come close to earning enough money to pay for those claims. Each line of business is meant to stand on it's own. The men who run them are in competition with each other at the same company be it for bonuses, stock options or promotions.

No well run Insurance Company should ever go out of business but then again a properly run one should not be making tons of money on premiums. Insurance is one of the few Industries that I believe needs Proper Government Regulation.

I hope no takes this as a defense of the Industry as a whole but consider it a small primer on how it works. No one who has not worked for a carrier really knows how petty and stupid they can be at times.

Since: Mar 24, 2007
Posted on: September 13, 2008 10:07 am

Where has all the money gone?

Angry Joe I am sure this topic deserves some attention but it is for another blog. This topic is about  real need, sports are an important topic as is the price of them. however they should have there own blog. If you would ike to post that blog I owuld be more than happy to support it.

Since: Sep 13, 2008
Posted on: September 13, 2008 10:02 am
This comment has been removed.

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Since: Mar 24, 2007
Posted on: September 13, 2008 9:27 am

Where has all the money gone?

True all that is so perfectly stated. I did not include a lot of the other premiums they chrge for all of the other products insured. I am sure the pockets have been filled and they have to wear cargo pants to keep up.

Since: Jan 21, 2008
Posted on: September 13, 2008 9:24 am

Where has all the money gone?

Sadur, I've thought about this in the past myself.  Let's not forget that if you actually have to file a claim, that they jack up your premiums.  Never mind the fact that you might have never filed a claim before, they still bleed you for it.  I had to get a new roof on my house once, and they almost doubled my premiums.  Needless to say, I changed companies. 

I think alot of our money that we pay in for premiums winds up in the pockets of the executives.  You know they're not working for free.  I'm not talking about the local agency head, but the top dogs in the corporations.  They line their own pockets, then they have to slide a little under the tables to the politicians and state insurance heads.  Then all of a sudden when you have to file a claim, whammo.  You have to somehow prove that the tornado or whatever wasn't caused by you just to get the insurance money that you have already paid in.

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