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Comment by nknealk | Hacker News Reader

> Insurance Companies play a similar game, based on the observation that a promise is a sellable good, and with enough statistics about various events occurring and their likelihoods, one can sell an unfair (worse than even) chance to retrieve the value of the promise.

Many insurance companies actually sell contracts below the fair price and earn money on the float.

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If it's possible for them to earn money on float via investments or otherwise, the float must have higher NPV than their expected payouts, no?

Yes, expected value must be measured against some reasonably risk-less rate of return (such as government backed bank accoutns, bonds, or similar).

I've seen advertisements for term life insurance with the premise that if you outlive the term, you get your premiums refunded. It was significantly more expensive than equivalent conventional term insurance.

I assume that was a high enough price to be basically covering the real wholesale cost of the death benefit, and an investment package to cover the risk of reimbursement.

In addition to that many of the largest insurance companies are also “mutual”. So they’re owned by the policy holders and any profits they accrue are distributed across the insurance pool.

Does that just mean that less capital is required to back the pool -- or is it a statement about morality?

Neither. Because of the nature of the business, it's far easier to run an insurance company when you take a 5-10 year outlook as opposed to the quarterly cycle that public companies deal with.

Insurance companies also invest the premiums. Having a pool of profitable investments to help cover their obligations is part of the business model.

That's the same thing as comment about float. Warren Buffett frequently talks about float. At Berkshire, they attempt to both sell premiums at a fair price AND win with float. Seems to have worked well for them.

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