Those who have followed my blog for a while knows that I have a high deductible health insurance plan that I pay $72/month for. Or at least that’s what I thought, until the insurer, which shall remain nameless (but it starts with an A.), decided to hike my premium to $100/month.

Did you know that one swears much more effectively in one’s native language no matter how many years one spends in another country? Did you also know that people tend to count in their native language as well. It is one of the last things to go.

Anyway? It’s not like I’m suddenly 38% older, nor have I even once been reimbursed for anything or ran my card towards the deductible. Even DW, who hasn’t been coddled by a universal health care system from birth and therefore is used to reading pages of policy small print every time a symptom appears, thought it was a bit steep, so how come?

It’s the economy, stupid!

A naive insurance company works on following business model

profit = premium – incurred losses – underwriting expenses,

where the premium is what is paid in by the customers, incurred losses is what is paid out to customers with accidents, and underwriting expenses being the cost of doing business e.g. paying for the buildings, paperwork, and people. Profitability can be compared across different companies by looking at the combined ratio which is the (losses+expenses)

This is a fairly simple business model, just like banking is simple if you stick to taking deposits and lending them out, but …

There’s another term called investment income, so

profit = premium – incurred losses – underwriting expenses + investment income.

Investment income originates from investing the float. The float is the premium that the insurance company holds until it has to pay it out in losses. It is the reserve so to speak. Naturally, if this gets invested in something risky, like uh say, the stock market, and the market goes down, profit goes down. The only way to remain profitable is to either reduce underwriting expenses or stick it to the customers, because people will not have less accidents one way or the other. This becomes particularly problematic if the combined ratio is close to 1 (the company is not actually making any money doing insurance).

So what did I do?

I went back to the website, ran my data for another insurance company (hopefully with a better investment arm or a lower combined ratio) and so now I got insurance for $69/month. Nice!

Originally posted 2009-02-23 16:12:06.