How Does Insurance Work? Insurance, defined simply, is a way of limiting risk in the case of losses or when the inevitable bad things happen. If you live long enough you'll probably get in a car accident (or several) or get an illness or have your possessions stolen. When those bad things happen it's much better to be insured, by a top insurance company, than not. Or at least that's the theory. There's some kind of insurances that you have to buy. It's the only kind of business where you're literally forced, with the penalties ranging from token to severe, to buy the product whether you want to or not. It's also a theory that the more people contribute to, say, a health or auto insurance pool, the cheaper overall insurance rates can become. This theory is often debated as insurance companies are in it to make stock market pleasing profit margins. In other words, while you're being forced to buy it, they're betting, really it’s an actuarial bet, that you'll never need or use that insurance. History of Insurance We know that insurance was first practiced by the Babylonians and the Chinese as far back as the 1750 BC. This was a kind of insurance that protected goods from being lost at sea. Modern insurance developed during Enlightenment era Europe where specialized varieties developed. Property insurance can be traced to the Great Fire of London where over 13000 homes were destroyed. By the late 19th century governments begin to start large scale insurance programs against sickness and old age. American insurance programs such as social security, Medicare and Medicaid grew out of this tradition and some determined lobbying by the American public. Kinds of Insurance Risks These are the kinds of risks that can be covered by insurance companies: Similar Exposure Units: This is something that is based on the law of large numbers or providing individual coverage for members of large classes, such as people who need healthcare or automotive insurance. The reason why you're forced to buy auto or healthcare insurance (under most state insurance laws and the new Affordable Healthcare
Act) is that in theory the more people who are in the pool the cheaper everyone's rates become. Definite Loss: This is the kind of loss that occurs at a known time from a known cause, or more realistically, a knowable cause. The example here would be burial of life insurance. Barring some dramatic life extension breakthrough this is the kind of insurance that everyone is going to need at some sad point. Can also cover some things like occupational diseases, such as black lung for miners or head trauma for football players. Limited risk of catastrophically large losses: There's some kind of coverages that simply aren't profitable to individual insurance companies. For example, the federal government runs and backs flood insurance losses even though private companies can sell the insurance. This would also be true of hurricane or earthquake zones. Types of Insurance There are many kinds of insurance. Here in the United States some kinds of insurance are actually mandatory which means you have to buy them or face civil or criminal penalties. Those are auto and health insurances respectively. But here's an incomplete list: • • • • • • • •
Auto Insurance Gap Insurance Health Insurance Income Protection Insurance: disability, long term disability, disability overhead insurance, worker's compensation. Casualty: crime, terrorism, kidnap and ransom and political risk Life Insurance Property: aviation, boiler insurance, builder's risk insurance, crop insurance, earthquake insurance, fidelity bond, home insurance, flood insurance Liability: public liability, environmental liability insurance, and professional indemnity insurance.
State Sponsored Social Insurance These might not be around if certain shifts in political power actually happen. But the government runs a lot of kinds of different social insurance plans such as: social security, Medicaid and Medicare. These are thought to be the kinds of insurance, which while socially beneficial, aren't profitable enough for private insurance companies.
Complaints About the Insurance Industry Not everybody thinks insurance practices are just fine and dandy. For example, if you're poor you often find yourself choosing between paying your mandatory auto insurance bills or paying your food bills, it would be nice to get relief from compulsory buy in. There have been a number of complaints, from insurance fraud to rent seeking, even the ethics as it’s seen as kind of usury in some religions. Hard to see how any of these things will change with the incredible lobbying power the insurance industry has in congress and the advertising power they have in influencing media. If you were getting a thousand Flo centered Progressive ads would you criticize the insurance industry? Yes, this is how the insurance industry also works. Or if you really want to read up on an alternative history of the insurance industry, then try a book written by Andrew Tobias called "The Invisible Bankers". True, the insurance industry provides a valuable and needed service here in the modern age but that doesn't mean it’s perfect or beyond criticism. How to Pick an Insurance Company There are many kinds of insurance companies in Summit that sell all kinds of insurance policies. How do you figure out which company is best for you? Well you need to do some research or at least a few Google searches to find out more about the insurance industry and what it does. Here are some tips: Read and Study Consumer Reports Advice on How to Buy the Best Insurance The reason you can trust Consumer Reports is that they don't take any advertiser money. Here's a bit of a puzzle: insurance companies spend millions in advertising dollars and, coincidentally, are never criticized by news organizations on those very same networks. Just about never on local news and not even high quality weekly news shows like 60 Minutes. John Oliver might mention them occasionally but that's because HBO doesn't take advertising dollars.
The Consumer Reports Insurance Center will help you find the best deals and tactics for buying car insurance, homeowners and renters insurance, life insurance, health insurance and other insurances like long term care and travel insurance. Only drawback: Some of these ideas are subscriber only, so if you want to know the best auto insurance companies then be prepared to pay up. It might be worth it though. But other articles, such as "How to avoid an ObamaCare penalty" or "Best insurance plans state by state" aren't blocked by a pay wall but some of their findings are. This really should be your first stop. They also have all kinds of helpful "explainer" articles in case you find insurance terms and ideas to be kind of complicated, which they often are. Consumer Reports even has an "Ask the Insurance Guy" feature for questions about insurance that aren't easily Googled or covered by their two dozen reports. Try to Find Objective Rankings Not Influenced by Advertiser Dollars You've seen, like, 80 zillion insurance ads by various insurance companies. But what about objective ratings of the insurance companies based on issues like overall satisfaction or policy offerings? Or here's an internal trick: When was the last time you heard something negative about an insurance company that does lots of advertising? There are groups that do objective critiques of business such as AM Best, JD Power and Consumer Reports. For example, JD Power ranks Erie Insurance as the award winner of auto insurance. Who are the plucky ("Sprinkles are for winners") and memorable ad pitchmen and pitchwomen and/or animals for Erie? Or maybe they spend all that advertising money on improving their customer service. It certainly seems that way when you compare scores between this relatively unknown company and giants like Progressive and GEICO. For example, Erie Insurance gets five stars in overall satisfaction and pricing and four stars for policy offerings. GEICO only got three stars in overall satisfaction while Progressive got a measly two out of five stars. On the other hand, it looks like Erie is only available in about 12 states and the District of Columbia. You can check out the Consumer Reports ratings here but you have to pay for it. It's behind a pay wall. Check Out Your State's Insurance Department Okay so you've studied all of the non pay wall restricted pieces at Consumer Reports and found some independent surveys and ratings of insurance companies. Your state also does rankings of insurance companies and some of those companies have very negative ratings.
For example, Pennsylvania has something called the "Pennsylvania Insurance Department" and at their site you can find something called a complaint comparison tool. The top five auto insurance offenders, and this is determined by number of complaints versus its volume, in 2014 appear to be: Repwest, Liberty Mutual, United States Liability Insurance Company, Farmer's New Century Insurance, and Safeco Insurance Company. But all these companies have very limited market share in Pennsylvania. You can also use the complaint index to find the best and worst homeowner's insurance companies, accident and health, life and title insurance. If you're looking for another state with this kind of information try out the National Association of Insurance Commissioners or NAIC. NAIC lists all of the country's insurance departments. Bottom line: If you study all of the resources from Consumer Reports, objective surveys of insurance performance and information from state based insurance departments, you'll get a pretty good handle of the best companies offering the best deals.