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Comment by richmarr | Hacker News Reader

Some insurance background:

The business model for conventional insurers is to take cash from the investment markets and hold it against their customers risk, gambling that their customers will on aggregate pay more than they claimed. There's presently more demand for this type of investment return than there is supply, so insurers are all scrabbling to find new types of product then try to drum up demand.

Assuming that's the force in play here expect to see a bit of PR trying to scare people as to the dangers of online abuse

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Isn't it in most cases the reverse? My understanding from reading Warren Buffet's letters for a while is that you take money from customers, try to keep underwriting losses to neutral or slight (though underwriting profitability is great), and then really make your returns on time-value-of-money on the float.

My business holds an E&O policy from USLI, a Berkshire Hathaway subsidiary. We pay them $2k a year for the privilege. I think from reading their annual reports that they earn a slight underwriting profit and make an absolute killing on holding hundreds of thousands of dollars from other firms for years before paying it out to the one unlucky winner of the lawsuit lotto.

You're correct. Insurance companies have several metrics called loss ratios. One of these is called the combined ratio and is defined as the sum of incurred losses and operating expenses measured as a percentage of earned premium.

A combined ratio of 100 means you've paid out $1.00 in claims and expenses for every $1.00 brought in as premium. Sounds bad but due to investments made an insurance company can still be profitable with a combined ratio of 100 or over.

> A combined ratio of 100 means you've paid out $1.00 in claims and expenses for every $1.00 brought in as premium. Sounds bad but due to investments made an insurance company can still be profitable with a combined ratio of 100 or over.

This is what they'll tell you, but most insurance companies make net revenue even before investment gains and assuming a combined ratio of 100, because they don't include the sale of ancilliaries in the combined ratio. If they sell you car insurance, the basic premium is used to calculate the combined ratio, any alloy wheel cover, no claims protection, lost key cover, etc are kept out to make it seem like life as an insurance company is harder than it really is.

I think you're spot-on in a scenario where insurance companies have deep enough pockets for any new floats they want to set up and had reduced regulatory requirements (with respect to things like EU Solvency II obligations)

I worked with a large company preparing for Solvency II. My impression was that it would generally increase regulatory capital requirements, not decrease.

Yeah sorry, comment written too hastily and had the inverse meaning I intended. I agree, Solvency II increases capital requirements. Edited to be "with respect to S2" rather than "such as S2".

Actuary here, though I don't work with these types of policies.

Your description of how insurance makes money is the standard understanding. However, I would think that most products do have some underwriting gain built in as well.

It can get pretty complex as you need to set up a liability (reserve) to match the assets (premium) that come in. Interest causes both the asset and liability to increase. As benefits are paid out, both the asset and liability decrease. If the liability decreases more than the asset, you make money. Or if you have a substantial surplus (asset - liability), the interest on that is pure profit as well.

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