Hacker News Reader

Comment by sbarre | Hacker News Reader

> After paying for broker commissions, fronting costs, reinsurance, customer service, claims processing, there’s often around 50% of the original premium dollar left to pay claims – which is the primary purpose of an insurance company.

What about shareholders? One of the biggest problem I have with insurance companies as for-profit enterprises is the inherent conflict of interest that comes from trying to service claims and customers as best as possible and turning a profit for shareholders.

I've always felt that insurance companies should be run as not-for-profits, or at the very least co-ops..

Don't get me wrong here, still pay the employees and the executives competitively (you want things to run efficiently and by talented teams so you need to attract top talent), but otherwise the whole enterprise should be working hard to make sure every other dollar goes to helping the customers who pay the premiums, and that's it.

View on HN

Something this article did not cover and which is often overlooked is that insurance companies invest the premiums they receive in order to help defray the cost of claims. Companies that are both talented and ethical will get a good rate of return on the investments, thus serving as good stewards for the money.

I am not a fan of general health insurance. I think the government should provide universal basic health care and there should be health insurance for emergencies and the like.

I don't think it matters so much whether it is a for profit business or a not-for-profit or a co-op. It will basically come down to: Are they actually ethical? Are they actually talented at what they do? Is the model of policy any good?

Those will be problems regardless of the form of the organization.

(Background: I worked for a big insurance company for over 5 years. As an employee there, I was sent by my employer to a local technical college to get training to do my entry level job. At least while there, this training entitled me to the spiffy title of "Certified Life and Health Insurance Specialist.")

This is one of biggest misnomers when we talk about health insurance. We buy life insurance but don't plan to die once a month. We buy car insurance but don't plan to crash once a month. We buy health insurance and although we don't plan to go to the ER once a month, we may plan on seeing a primary care physician once a month whether for a chronic condition or maintenance or mental health or... Insurance is intended for unexpected things not expected things.

I think the way to fix this is similar to what you said. Primary care should be provided for everyone and the way you drive that cost down is by using more PAs, CRNP/other nurses and having only one actual Dr. for oversight and tougher cases. There are huge system costs that can be removed just by focusing on things like treatment compliance, pre-habilitation, healthy lifestyle, good mental health, etc.

Yes, I basically agree. I posted this link about Direct Primary Care elsewhere in this discussion:

http://micheleincalifornia.blogspot.com/2017/01/direct-prima...

Direct Primary Care is on the rise in the U.S. It is a saner solution than Obamacare, which forces premiums up crazily for everyone and is a terrible model. If we, as a nation, want to insist on market based solutions instead of the government playing a more central role, then Direct Primary Care is a far saner answer. You pay for basic care out of pocket in a way that helps keep costs down and you get insurance for actual unexpected emergencies and major health events.

The other problem with health insurance is that it doesn't serve the preventive role that car insurance serves. Car insurance is required by the state you live in and the details vary by state, but if you get too many tickets or have too many accidents, your premiums go up. So, it serves as a deterrent to bad driving behaviors. Furthermore, it doesn't just cover your losses. It covers damages done to other people. If you get in an accident and are found to be at fault, your insurance pays for their repairs.

Unlike car insurance, health insurance does not play a real role in pressuring people to behave more responsibly. So far, we have found no means to really do that effectively. Health issues are far more complicated than safe driving issues. You don't drive 24/7, but being alive 24/7 impacts our health for good for ill and in ways we don't completely understand. So it is a very hard problem to solve.

What we do know is that when people do not have access to basic health care in an affordable manner, health outcomes are worse and, thus, more expensive. So we need to find a means to get health access to more people in a way that is preventative. Direct Primary Care and government funded services seem to do that. Health insurance really does not.

It is interesting and that is one thing that I didn't mention. You can do primary care as free or a HSA path. I think the states should offer an HSA so it isn't dependent on your job. Then you can use it for dental or checkups or whatever.

I think the only way to handle the the deterrent/incentive piece is to find a metric that can be used. BMI is worthless as people vary too much. The best thing in my opinion is HA1C levels, but use it as a discount on your premium. You can't cheat A1C and most of our chronic diseases and inflammation causes are caused by poor diet. This forces people away from that if they want the discount. The only problem is high carb diets are cheap (rice/pasta) and healthy diets are expensive (lean protein/vegetables).

The biggest thing we need to change is to remove all the middlemen from the system. Each takes a cut and adds to the cost without having value. The biggest problem with health insurance is it isn't event driven like death or a crash. How do we stop everyone from being on the cheap plan for emergencies and then switching to the best if they get cancer? (Although one piece may be in the incentivizing better diet reducing cancer risk). I do keep wondering if it makes sense to flip it and make that the emergency part is tax based and mostly free to the person. You can then make the deductible based on the person maintaining healthy stats. Never go to the doctor and eat junk? You pay 25% of the total cost. Eat healthy and go for routine check ups? You pay 5% of the cost. Tough to know without running numbers.

All tough questions with no easy answers.

Imagine if you paid for gas by using your auto insurance card? And also used insurance to cover normal car maintenance such as brakes, tires and oil changes. Now the co-pay on a tank of gas would be about 40 bucks, and if you tried to buy gas without insurance it would cost a couple thousand to fill the tank. But the insurance companies get a discount, and only end up paying 5 dollars per tank.

My home insurance in Sweden was a co-op, and they'd pay back any profit they ended up making as a refund https://en.m.wikipedia.org/wiki/Länsförsäkringar

Is there a practical difference in cost though? A Dutch insurer (Univé) used to do the same, but in practice there turned out to be no significant different in total amount of money spent by customers. Even though they gave their profit back to their customers at the end of the year, they couldn't compete on price.

> Is there a practical difference in cost though?

There has to be since no shareholders are involved assuming the rest of the setup is the same. If they are not cheaper then it's more likely that the coop is badly run which sadly is not uncommon.

There's at least one other alternative. The NFP uses the excess to pay better wages across the board. Thus benefiting every community those wages are spent in, which will usually be local (both to the business and it's clients).

Monies move toward local, low cost and essential spending as opposed to remote, high cost and luxury spending that one would expect to dominate with dividends paid out by for profit businesses.

I live in Sweden too, and Länsförsäkringar weren't cheaper than the alternatives for the things I looked at (car insurance, home insurance).

That's just looking at the premiums though, there's no way to see any potential refunds and take those into account.

I just looked it up again for my car insurance.

I pay 758 SEK per month now and with Länsförsäkringar I'd end up paying 968 SEK for the same coverage. I do have a 10% discount on my current insurance due to having several policies at the same company. That's still less than the difference though, so Länsförsäkringar would have to refund me around 1200 SEK per year to break even.

That would be around 10-15% of the entire yearly cost, and I don't think they can promise those kinds of refunds year over year.

I'm with Länsförsäkringar because, for me and my situation with cars and houses and everything else I've got insured, it was cheapest.

But you cannot just compare for price; you also have to compare for cover and självrisk etc.

Pretty much all insurers bend over backwards to avoid paying out. I have no idea if Länsförsäkringar is particularly good or bad in this regard.

One big non-profit player will drive all the prices down thanks to competition.

There is no reason for private insurance to be more expensive if they have non-profit competitor. If this competitor was to disappear, on the other hand, the costs would probably sky-rocket.

Or not, because the for profit businesses might be more efficient, since they have incentive to be.

This is popular wisdom but experience show the opposite: for profit insurance companies tend to be less efficient. I am not sure what the reason behind is.

For me getting a home insurance for my rental apartment in Sweden, Länsförsäkringar in my region (They're split up in regions) was the cheapest one at the time I was looking.

My home and auto insurer, Amica, is mutual company today. I'm not sure if there's a difference between a mutual company and a co-op.

A co-op could be a mutual company (i.e. owned by its customers) or it could be owned by its employees. It's an umbrella term for both.

Ah, makes perfect sense.

A lot of life insurance companies (e.g. the Prudential) started as mutuals. In the UK in the 90s there was a wave of "demutualisation" where the customers decided they'd take a one-off payment in return for handing control over to shareholders.

I don't know if it was done similarly in every case in every country, but my experience is that the customers became shareholders (with an option to sell the shares immediately, which I guess almost everyone exercised).

Came here to say this. Probably most of the insurance companies were mutuals prior to demutualization.

Probably the biggest consumer-owned business we have today would be Vanguard, when it comes to investment funds, but for a variety of reasons most industries have shifted to the corporate model.

That's one of the hardest questions to answer. In order to generate profits for shareholders the carriers have to generate return on their float. That was "easy" during the big bull market that started in the 80s, but has become increasingly difficult.

There are a number of very large and successful mutual insurance companies - take a look at USAA. They also happen to enjoy some of the highest customer satisfaction ratings in all of financial services.

USAA is still affected by many of the same forces that affect for-profit insurers. USAA has changed a lot in the last 20 years as they've opened up to more members.

I guess I don't really see your point.

Suppose we take two situations:

#1 As described in the article, between the premium and the actual claims pool there's 50% lost to all the entities involved -- from brokers up through reinsurance companies and back down to the entity that actually cuts the claim check. But further suppose that all these companies happen to be co-ops and so no dollars are lost to passive investors.

#2 There's a vertically integrated insurance company that is highly efficient. It only sells directly and doesn't use commissioned salespeople. It has overhead of only 25% and pays a 10% of revenue dividend to its shareholders, leaving 65% of premiums to pay claims. This enables the company to offer lower premiums for the same coverage.

Is #1 somehow morally superior to #2? Do you think it is impossible for #2 to exist?

> Do you think it is impossible for #2 to exist?

not the OP but, in the long term, yes, I do believe a for profit entity is at odds with that. Shareholders clamor for more profit and will not be content with no growth.

Shouldn't we expect plenty of revenue growth since the efficiency edge over competitors means they can charge lower prices? 10% of a growing revenue stream looks like a recipe for pretty happy shareholders.

You can certainly expect it short to medium term yes. Longer term I don't think so.

I think Sebastian is introducing an orthogonal perspective, which has nothing to do with morals. The theoretical ideal is that an insurance company nets zero profit while operating at maximal efficiency. Introducing a third-party (investors) that benefit from extracting revenue is a form of overhead that decreases that potential efficiency. This isn't all bad though. Likely, if it were not for the investors, the company would never exist, so they should have rights to a piece of the pie. Unfortunately, the trade-off introduced is conflict of interest.

Investors reward behaviors that maximize revenues be it through cost-cutting, premium hikes, or benefit reductions (or potentially the opposite assuming sales increase enough.) Granted, some of the more negative actions might cause customers to move from one provider to the next because of free markets and whatnot, and theoretically, the market should reward the company that provides the best balance for customers... except that almost all insurance companies are owned by investors, and over the long run, these investors incentivized to maximize revenue in prisoner's-dilemma-like fashion.[0]

So... I'd argue introducing investors over the short term is a fantastic idea, but at some point, it's probably wisest give them a heap of profits, and turn off the tap. Otherwise, the company will turn into yet another publicly-traded monstrosity with a mechanical conscience.

[0]: https://en.wikipedia.org/wiki/Tacit_collusion

I think your example is overly simplistic, but I understand what you're saying...

To stay at that level, I would say that while there's nothing inherently bad about #2 it would be better if 75% remained to pay claims, and then they would not only offer lower premiums but better coverage.

And as someone else said, this isn't about morals, it's about priorities.. An insurance company should exist primarily to protect it's customers.

That said, if investors were contractually bound to accept only a fixed return over a period of time (almost like a bond or a GIC or something?) and had no voting power or influence in the direction of the company, that could work?

My issue is less about "investors" and more about focus and priorities I suppose..

I once read an interesting story about the host* business. Apparently the dominant player is a for-profit business.

The competition is convents around the country that have traditionally supplied them to parish churches. Here you have organizations that are as non-profit as they come -- convents aren't like many hospitals where the CEO and other high level employees are raking off a huge salaries as quasi-profit. And the motives and priorities couldn't be any purer, their work is essentially in the service of what they consider the glorification of God.

Yet they are being out-competed by a for-profit company that explicitly tries to make on every sale in order to compensate the owners.

How do you explain this if you view profit as deadweight loss that can only be at the expense of customers?

Edit: https://www.vice.com/en_us/article/vvaeyb/the-surprisingly-c...

*The bread that is used during Catholic masses.

So first off, you're adding additional meaning to my statements by saying things like "you view profit as deadweight loss", which is not what I said at all (or if that's what you understood, then my apologies).

Secondly, I don't really think I need to disprove your anecdotal scenarios (which aren't really apples to apples anyways) in order to stand behind my statements..

I will say this: I did originally say that executives and employees should be well-compensated and that the company, while not profit-driven, should still be making enough money to attract top talent and be competitive in the market.

My idea was never about running an insurance company like a charity or a tiny unsophisticated business (as in your host example), it was just about not prioritizing shareholder profits over the core business service provided to the customer (i.e. providing coverage and paying claims), which is what many publicly-traded insurance companies do today.

Lemonade is a NYC based insurance start-up that is doing this idea but one better. They are building two halves of the business: a for-benefit corporation that is the insurance carrier, and a for-profit, broker side that takes a flat 10% commission on premiums. They are getting great traction in the few states where they currently sell insurance

https://www.lemonade.com/blog/its-not-our-money/

In CA there is heavy competition between not-for-profits and for-profit. Kaiser and Blue Shield are both not-for-profits. I'm not sure why you would pick a for-profit here given those options

Blue Shield of California lost their tax-exempt status in California a few years back.

They lost their ca tax exempt not for profit status but they are still not for profit... which means they pay normal taxes and still operate as a non profit, which is actually pretty amazing in my opinion.

They also limit net income to 2% of revenue and refund anything more.

https://www.blueshieldca.com/bsca/bsc/public/member/mp/conte...

How is that still a thing? The LA Times article mentioned that they've never had status with the IRS and that they lost status with the California taxmen.

Ah. "Not-for-profit." Yeah. Right. How many millions do the execs get in salary? Those are costs, not profits, right?

edit: typos

Not for profit doesn't mean that the people doing the work don't get paid. It means that the entity doesn't exist to payback a financial return to its investors.

Think of it this way, a not-for-profit insurance company has to pay its executives, staff, and so forth, while a for-profit insurance company has to do all of that and show a return for its investors.

I think you missed the point he was making.

When an exec makes 22 million at a for-profit company which produces dividends that might make its way into your 401k people have a hissy fit.

When a not-for-profit company pays their execs that much, those same people don't even know, because it's "not-for-profit" they assume it's more charitable somehow.

I don't think it was the reality that the prior comment lamented, but people's perception of it.

There have been moments in my life where I've wanted to smack smug idiots who, when asked what the do, say "I work for a non-profit doing X." As if that makes them better than the rest of us.

I think in insurance, there should be two separate pools of money, one for the insurance fund itself, and the other for managing the fund (management of the risk model) and making profits for the owners of the insurance company. These should be separate items on your insurance bill, and no money should ever cross the line from one pool to another.

In a for-profit company, there's a group of people at the top who are paid handsomely for cutting costs (i.e. stock-based compensation). This doesn't exist in NGO's, and so for large organizations with lots of cash flow, bloat balloons exponentially (because the default, human loyalty of an employer is to their employees, not their customer)

NGO are trying to cut cost down. They tray to focus to their mission as efficient that they can. Doctor without Border is faster in some case than public emergency service.

The difference is that what is seen as cost, private company often see the product they deliver as a cost.

Is generating enough income to give a profit to investors so different from generating enough income to meet operating expenses. Even without investors, if I was working at an insurance operation I'd feel a conflict between trying to be good to customers and trying to keep the lights on.

Insurance companies used to run as mutual companies. Part of insurance is investing all that money. A lot of mutual companies become pseudo public companies so they could access cheap capital then grow faster. Of course once nationwide grew as big as they did they went private.

There are alternatives.. we are setting up an insurer with a new business model in the UK.

We earn a flat fee every time we settle a claim for members of our community - they provide the funds to cover for each other.

No conflict of interest, fair pricing, everything instant.

Have a look. insureathing.com

Interesting, but the variable premium scares me. Is there no limit on liability? What happens if lots of people claim in the same month?

If there are outliers and the premium would skyrocket we cap your premium at market rate through an agreement with a reinsurer. It's a standard financial tool insurers are using as well and costs us next to nothing.

Aren't car-insurances sort of co-op's? Atleast I've read verbiage in my California car insurance policy from Farmer's that indicates that the insurance policy is really owned by the pool of users taking insurance and Farmer's is just a manager taking a government controlled percentage for their operating costs + profit.

In your case, that's true. Farmers is a reciprocal, meaning that the policyholders own it. Not all car insurance companies work this way.

I believe that Farmers is owned by Zurich Insurance.

I feel like this is the case for a lot of big industries in the US. Insurance, especially health insurance. Personal banking with credit unions. Maybe even pharmaceutical companies.

Reply on news.ycombinator.com