Comment by breatheoften | Hacker News Reader

Comment by breatheoften | Hacker News Reader

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I really start to struggle with the concept of insurance whenever I imagine the percentage of people working at the insurance company who’s primary incentives involve making sure that I do not get the payout I need should a disaster strike ... how many people are there strategizing the legalese and structure of the policies in a way carefully designed to appeal to me at sale time but to hurt me at claim time ...?

I also shudder at the thought of overly large executive teams milking the profit stream of the company to ensure optimal balance sheet (minimal legal unleveraged asset amounts + maximum access to government lender of last resort backstops).

It’s also very hard for me to imagine the nature of the value chain back to me that comes from the CEO of an insurance company flying around in a private jet at great expense — it’s just not possible for me to imagine that the team of suits in jets running the insurance company could ever be engaging in an activities beneficial to me as they pursue typical corporate business activities...

As a consumer, I think the most sensible strategy for picking insurance involves modeling the profit center clauses of the policies to find who is most likely to be bilked and trying to estimate whether you are more or less likely than the average consumer of the product to hit one of those likely policy “profit centers” ...

In markets where the profitability of insurance companies is regulated, I have a lot of trouble believing that “boondoggle machines” aren’t invented throughout the enterprise to create false cost drivers that ultimately turn profits into costs and higher executive salaries/ bonuses - a kind of profit money laundering.

I think that trust is very valuable but it’s hard for me to believe that insurance companies as a general category are likely to be worthy of trust. If anyone has some arguments how to get over this hangup, would love help shifting my mindset to a less negative outlook here ...

This really isn’t how insurance works. These are regulated industries where pricing, underwriting and actuarial models are under heavy oversight. No one at an insurance company is designing policies for you to get screwed over.

Most insurance companies are relatively low margin enterprises. Most for profit insurance companies manage to turn a 0-5% profit. Claims make up 60-75%, ~15-20% in acquisition related costs and then other expenses like r&d, servicing costs, etc. end up eating the rest. Auto insurance for example is historically a break even business or small loss on underwriting premiums for most companies.

Companies that can underwrite profitably actually help keep the premiums that consumers pay down and keep the market in check from inflating premiums.

I used to work for a car rental company. Actually, it was an insurance company that rented car. Cause 80% of their profits were on the insurance. The car rental part was just to bring more people to insurance part.

Car rental companies seem to deploy exactly the kind of tactics that motivates my skepticism of insurance companies in general.

Car rental companies are notorious for deploying high pressure sales tactics to bully customers into paying for damage waiver or insurance upgrades. I’ve heard of companies basing bonuses for employees on these conversions and I’ve also heard of companies that just have a hard and fast quota with policies like “you need to get this many upsells per unit time or you are automatically fired”.

The fee structure and legalese for rental cars is often customer hostile for the purpose of scaring people into paying for upgrades they don’t need — and in many cases very large categories of risk are excluded from coverage via tricky language ...

I rented from a company called goldcar in Spain recently. Their rental prices are insanely low (paid 30 euro for a car for 3 weeks). They seem to make money entirely on the extras and the float of your excess deposit. They charge you your excess in full when you pick up the car (1200 euro for the car I had) then refund you when you return minus any damages. I’ve rented from them a few times and they do some shadey things which I’ve learned to be careful about.

- They have a range of constantly changing and sometimes screwy refueling policies: buy the tank in advance return empty, “flex fuel” where you pay a (non-refundable!) fee to pay a deposit on the tank and then get refunded your deposit based on how much fuel is in the tank when you return it, and (only sometimes and seemingly at a different rental rate) buy full return full. - Once they charged my card in dollars rather than euros (without asking) resulting in a huge 5% currency conversion fee by their payment processor - I can’t imagine that fee doesn’t make it back to them in some amount ... (that really pissed me off and I probably wouldn’t ever have rented from them again but I actually didn’t notice this until much later)

I think they’ve gotten dinged in the past for some illegal/deceptive practices. I personally have mostly come our ahead using them — but only by being careful and knowing exactly what to say/do on each rental experience ... I think from recent rental experiences it has gotten less scammy for me.

The mentality necessary to navigate rental car insurance decision making seems the same mindset required to engage in business with other insurance entities - most insurance markets generally seem ripe to me for similar adversarial game playing ...

But how fungible are the categories applied to a given cost source? Suppose a company finds a way to target customers in a way they predict is likely to outperform the actuarial models using “expensive ad tech”. They can shave off some of the claim cost, but avoid underwriting profitably by inflating the cost of customer acquisition (including big bonuses for their “industry leading” customer acquisition performance ...)

To me some variation on this kind of scheme seems likely to be common - am I wrong headed to think these kinds of tricks occur often?

No I don’t think that wouldn’t work long term at a public insurer. Expense measures are fairly well understood by analysts, investors and regulators. If expected claims got out of wack with pricing it would become a problem for an insurer.

Many insurers have near fixed acquisition costs due to distribution channel realities. Agents take a commission, Google and Ad networks take a referral fee, etc. and those with large direct to consumer portfolios may experience challenges in underwriting profitability as is. Insurers will certainly try to manage those acquisition expenses efficiently and to optimize underwriting performance. Executive comp would be anchored on those things rather than allowed to underperform and compensated for.

If you call beating actuarial models a trick, then yes that certainly can occur but that’s kind of the name of the game. You’d rather companies figure this out because models become more efficient, pricing becomes more segmented and risks are priced accordingly.

Your arguments apply to every company---do you not deal with grocery stores?

This is a good point I think — but I don’t find myself biased to perceive buying groceries as entering into an adversarial relationship with my grocery store — maybe because the relationship is transactional and tends to end immediately after the transaction...

Maybe I’m wrong but I don’t think there is as direct a conflict between me and the grocery store — me being happy with a particular purchase is not generally associated with the grocery store being “unhappy” that a particular product “works out for me” when I consume it ...

Repeat transactions are very common at the grocery store, very rare (if including actually getting a claim) from an insurance company.

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