People would sometimes grumble whenever they have to pay their insurance premiums. The cost of insurance premiums, the seemingly waste of good money (for accident-free drivers), and the huge amounts of cash these insurance companies seem to be making adds to your annoyance.
It seems unfair that as a brand new driver you are subjected to paying high premiums when you have never had an accident. On the other hand, your insurance premium payments are also high because you are a senior citizen.
The other thing about insurance companies that bugs people is that they are all privately owned, which means that it is profit-driven. Unlike government-run businesses that subsidize its services so that it is more affordable to people.
The most contact the government has with these businesses is through the regulation of the policies of these insurance companies.
How come the government does not have its own insurance company?
The fact is we only understand one side of the story and that is when we have to pay our premiums. The other side of the story has to do with the fact that the business of insurance is a very high-risk business. Which is made even more volatile by trying to calculate variables that you have absolutely no control or influence over.
Being covered by insurance is actually a safeguard for the public, which helps to reduce the likely hood of an accident; because to obtain car insurance you must have a valid driver’s license, your driving record is taken into account, especially if you have any DUI’s. If an individual does not meet these requirements then he will not be insured.
Having insurance really means that you will be ‘reasonably covered’ in an accident. It doe not mean that you will be fully covered. Suppose you caused an accident and the cost of repairs for the other guy’s car is fifteen-hundred bucks. Which is more than you are insured for in an accident.
Your insurance company will either pay for the guy’s repairs in full and raise your premium to compensate for the extra cash they paid out. Or they will only pay the amount you are covered up too. The rest will come from out-of-pocket.
If the government were to run insurance companies, it would mean a tremendous drain on its resources, because nothing less than a perfectly working system would have to be put in place to regulate all of its insured clients.
Also, insurance companies pay out billions in claims every year and to lessen payouts. Insurance companies have been accused of using stalling strategies. Hence the reason why people have grown to distrust insurance companies with a passion.
If the government was placed in the position of always having to pay out claims, then it would bankrupt itself. And if it chooses to drag its feet on claims people may be inclined to civil unrest. The point is, regardless of the perception you may have of insurance companies. They provide a valuable service and a counter-balance to the way things are run.
How Your Homeowners Insurance Company Uses Your Premiums
One of the most common misconceptions is that insurance companies collect premiums and just spend all of the money. They must have pretty high-profit margins, right? All they do is take peoples’ money and they rarely pay out a dime. Well, you might be surprised to learn that insurance companies have razor-thin profit margins. Most of the money they collect goes right back out the door. What do they do with all that money?
Taxes and Overhead
Insurance companies pay taxes just like everyone else. Of course, they only pay tax on profits – which are surprisingly small. Still, it’s a cost that insurers bear every year.
Another expense is overhead. You would think that insurers would be raking in the dough and cutting employees’ fat paychecks. While some executives do make a lot of money, most people working for the insurer are paid a modest salary. This salary is part of the overhead expenses of the company.
Other overhead expenses include utility bills and company benefits like retirement and health insurance plans.
Homeowner’s insurance companies make a lot of investments. That’s how they’re able to pay insurance claims. In fact, this is where most of the money goes. Insurance companies have to conservatively manage the money they collect and protect it for the benefit of policyholders.
A substantial portion of the investments in an insurer’s portfolio includes government bonds, but they also invest in corporate bonds, high-value common stock, real estate, precious metals, and even some speculative investments (though these represent a very small portion of the insurer’s portfolio).
They’re so good at managing risk that there hasn’t ever been a single year when an insurer has lost money. There may be years when they don’t make a lot, but they always profit. They are considered by some to be the best investors in the world because of this.
When you have to file a claim with your Calgary home insurance company, the money has to come from somewhere – the insurer’s cash reserves. This is where a good chunk of money goes that the insurer takes in. While insurance companies try to be conservative in their claim payments, they still have to abide by the contracts that they issue.
Most people pay their premiums faithfully every month and then forget about the money. Some people pay in for 10, 20, even 30 years and never collect. Sometimes, these same people feel that it’s unfair that they never receive any money from the insurer.
However, this is the nature of insurance – it gathers together a large group of people with the explicit goal of spreading out the risk of financial loss associated with a house fire, theft, or act of God. It’s explicit in every contract that you may never get a return on your premiums. The only way to collect is to have something catastrophic happen to your home.
But then, that’s why we buy insurance – not because it’s an investment for us, but because we want to be protected from the “what if’s” in life.