Business model insurance industry
In no other industry, besides insurance, is conflict of interest considered to be a good thing. Instead of a problem, it’s a business model. The intent of insurance is to provide coverage for risks and, should those risks occur, pay resulting claims fairly and in a timely manner. The ways by which insurance corporations earn revenue actually reward companies for breaking the promises they make to policyholders. Perhaps no other tactic illustrates this point as well as the insurance industry’s practice of delaying the payment of claims.
It all started simply enough. Once upon a time, after the insurance industry became commercialized but before it turned into the warped industrial juggernaut it is today, insurance companies earned money through a strategy called “float.”
It’s your money that the insurance company has floating around in investments, but they’re the ones enjoying the extra income while you can’t even get the coverage you paid for. Photo Credit: Corbis Images.
What do you think happens to your money when you pay your insurance premiums? Your agent or the likeable characters from the company’s advertisements don’t just stick your payments in a shoebox marked with your name. They invest it.
And because they have quite a lot of money to invest, those investments tend to be highly profitable – so much so that even if the insurance company were paying out more money in claims than it took in in premiums, it could still afford to stay in business. Consider that for a minute – thanks to investments and the nature of the business, insurance is the only industry in which a company could lose money but still end up “in the black.” This investment income is known as float, and for many years, it made insurance companies rich without regard to the costs they paid out in claims.
Fortunately for the insurance companies, while the average American has been struggling through recessions just to even make ends meet, these investments have continued to prosper. Photo Credit: Corbis Images.
Float money can still enrich the pockets of the wealthiest insurance companies. That is, as long as these companies do one very important thing: keep that money invested for as long as possible.