PSA: I am not a cynic; I understand the concepts being discussed, and it might appear that I am cynical about insurance companies by the tone of the writing. Please note, I am generally in favor of the insurance industry. However, when government mandates insurance coverage to spread the risks out for the benefit of the insurance industry, insurance has become a tax. When a business offers insurance, but the co-pays and the costs are too high, insurance is no longer a benefit, and I want the option to opt-out of the employer “benefit.”
Insurance as a concept has been around for a long time, historically speaking. Maritime insurance was a concept from the 1340s, and Benjamin Franklin dreamed up property insurance in 1752, becoming America’s first insurer. Insurance separated investment as a method of managing risk, making investing more palatable and shoving the consequences of natural disasters, pirates, and other methods of losing onto another responsible party. Some of the biggest names in insurance can trace their roots to the Great Fire in London in the 1660s. We mention all of this, as a foundation for understanding the role and the meaning of insurance.
Interest vs. Investing
Interest, in this usage is referring to the advantage to a group or single person, as well as improving one’s welfare. Maritime shipping would take on several loads, and people who owned those loads had a vested interest (having a personal stake in something) in seeing that ship arrive on time at its intended destination. For example, sugar has been a huge commodity in history, and a sugar mill would ship the sugar to destinations for sale. People interested in improving their welfare could invest in the sugar mill, or with a higher risk, expecting a higher return, invest in the shipping company, or the ship. Thus, investing became one where opportunities to increase interest became popular.
The modern stock market traces its roots to the 1600s and the Amsterdam Stock Exchange, where for the first time, people interested in investing could be joined to companies needing investors, and money could exchange hands for certificates (stocks or bonds) showing interest. A point of reference, the Dutch East India Trading Company was an original benefactor of the Amsterdam Stock Exchange, and sugar, molasses, and spices were the commodities being shipped. Not saying all the Dutch East India Trading was in non-human commodities, but sugar was a huge driving factor for separating risk through insurance that drove the stock exchange creation.
One final point, government’s have interests, generally traced to those paying the highest taxes, or with the most political connections. Government’s do not have allies, as much as they have groups of governments that share a common interest. For example, countries belonging to NATO. NATO is the North Atlantic Treaty Organization and was designed for those countries with interests in seeing trade safely through the North Atlantic. Not all the countries in NATO are friendly with all the other countries, but the common interest in seeing trade and markets operate smoothly has generated NATO and kept it alive since 1949. Government never has friends; they only have relationships based upon mutual interests. These are cogent points that must be remembered! Incredible as it seems, interests change, and when interests change, relationships between countries and governments force ideological changes, and today’s relationship might not be the same tomorrow, which is one of the reasons why the United Nations is such a pile of hypocrisy and uselessness!
Insurance and Investing
Insurance as described by Webster’s dictionary is a practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium. The payments of premiums provide the insurance company with vast sums of cash. Some of which are placed into long-term investments, medium -term investments, stocks, bonds, T-bills, and other methods of protecting the money paid in premiums. The higher the risk, the higher the cost of the premium. The one rule in insurance that has never changed from the 1300s is, if the insurance company can collect a premium, and not pay on a claim, the interest the premiums collect remains and the shareholders see larger returns on their investments.
Hence, lawyers and bankers have a vested interest in seeing insurance companies not have to pay claims, but still collect premiums. Thus, contract law was established, and the insurance companies took full advantage of language to protect their premiums from paying a claim. Another growth industry directly tied to the insurance industry, was special courts for hearing claims and awarding damages (Tort Law). Cornell Law university provides some clarity on tort law, “A tort is an act or omission that gives rise to injury or harm to another and amounts to a civil wrong for which courts impose liability. In the context of torts, “injury” describes the invasion of any legal right, whereas “harm” describes a loss or detriment in fact that an individual suffers.” Placing insurance companies squarely into the middle of tort law, and thus opening up new avenues for protecting against paying a claim from the premiums paid and invested.
Types of Insurance
Important to understanding, Carl Marx and communism uses the ideas of mutual insurance companies to create a society where all share the risks, all benefit in the gains, at least in theory. However, like insurance companies, someone in communism must enjoy all the benefits for taking the risk of establishing the community, and the reality of China, Cuba, and USSR become evident. Where the leaders take everything for themselves, and the regular people live in squalor and depredation.
Janet Hunt wrote an great article on types of insurance companies and her article can be found here. Currently there are nine different types of insurance companies available and are detailed below:
- Mutual Companies – owned by policy holders who are also considered shareholders, sharing the risks, and benefiting from the lack of paid claims. The mutual society of this type of insurance company shares dividends and when losses occur, generally the shareholders (policyholders) might not see an increase in premiums.
- Stock Companies and Mono-Line Carriers – Stock companies are corporations and the distribution of dividends become payments to shareholders. These insurance companies are very averse to paying claims. Mono-line carriers only carry a single type of insurance. For example, a company might only carry car insurance, specializing in just car insurance provides savings in overhead, and they might have agreements with other carriers to provide linked coverage for other insurance products.
- Lloyds of London – When you want to insure the weird, Lloyds of London is the carrier of choice. I cannot tell you how hard I have laughed at people willing to insure body parts, unusual, or high-risk items. Share my laugh, look up what policies Lloyds has written insurance policies for and you too can have a good chuckle. Lloyd’s does carry insurance for mundane and normal, but those policies do not make me laugh. I feel sorry for the citizens of the United Kingdom, since Lloyd’s of London is backed by parliament, the taxpayers are on the hook for Lloyd’s losses eventually.
- Alien Carriers – These are insurance carriers that are owned and operated in one country, doing business in another country, selling premiums, and paying claims. Important to note about alien carriers, the lawyers charged with engineering methods to control risks to paying claims can create a nightmare using the laws of both countries. Alien carriers can also be operating in one US State but be owned and governed in another US State.
- Domestic Insurance – These are companies who are owned and operate in a single US State, or other geographical area. For example, a domestic insurance company in Texas, might or might not have the ability to operate outside Texas, where it would be considered an alien provider.
- Direct Sellers – Do not use insurance agents, selling directly to the public or insurance consumer. To be considered a direct seller, the majority of the business occurs online or over the phone. Direct sellers are pretty straight forward, and some of the biggest names in insurance providers are direct sellers.
- Captives – A captive insurance company is a unique insurance provider, generally specializing in one type of insurance product for a specific industry or groups of individuals. For example, if a business owns a fleet of vehicles, they will have insurance through a captive insurance company who specializes in handling the risks of fleet vehicles. Another type of captive insurance company occurs when a parent corporation needs insurance but builds a branch of their company to handle the insurance instead of going through an insurance company. In this model, the parent company keeps the premiums in-house and has a vested interest in protecting their investments.
- Standard Lines – This is your normal insurance company with insurance agents, local offices, is regulated by the state board of insurance, pay fees into the general state guarantee fund, and are subject to the laws and ordinances of the state in which they operate.
- Excess Lines – Think of these companies as insurance for high-risk individuals and companies, who cannot get insurance through a standard line company.
I know, that is a whole lot more than you think you want to know about insurance companies. However, my only logic for making these distinctions in this article is to aid in understanding the classifications of insurance company, and some of the peculiarities in insurance products. I feel the more you know, the better questions you can ask, leading to improvements in your bottom-line.
With all the ties to investing, savings products, and the flow of money into and out of an insurance company, the discussion of insurance companies remains critical. Especially when the government can create an insurance company, then mandate that company be used to provide coverage, creating a tax and fee that the taxpayer might not realize. For example, around the time that states began demanding drivers have car insurance, GEICO began selling policies to non-government employees. GEICO is an acronym for Government Employees Insurance Company, and by selling policies to non-government employees, the government is able to reduce the risk of insuring their employees. Thus, an argument can be made that the government only created GEICO to reduce the risks of insuring government employees, as well as benefiting from a flush of cash from premiums paid.
Both Lloyds of London and GEICO leave me worrying for taxpayers. However, since the US Government is the only provider for some types of insurance, specifically flood insurance, which is mandatory for homeowners living in a flood plain, one must ask more questions about where the money goes and why? What steps have been taken to protect the public from large scale incidents where the insurance company will have to make massive payments? What does the government invest in to protect the premiums paid against the time of claims?
When a person begins discussing savings instruments, investments, and the links between insurance companies and government, a lot of potential questions arise, and the answers become more sparse inversely to the specificity of the questions asked. For example, if a savings account interest is so low, due to inflationary spending by the government, what interest does the government, as a holder of savings accounts, receive for their investment? Where does the government invest their premiums from insurance payments? How is the government protecting their customers from inflation as a result of poor fiscal policy?
Never forget, an insurance company must pay dividends to their shareholders who have invested interests (money). GEICO is a Berkshire Hathaway company, and stopped being publicly held in 1996. The questions for why the Government Employee Insurance Company is wholly owned and operated by Berkshire Hathaway opens a lot of questions. This would be akin to Lloyds of London being sold to a private company, where parliament stopped caring or backing Lloyds. Why becomes a major question requiring detailed answers. Look at the political situation in America at the time of the sell, and more questions rise, and less answers are provided.
America, when it comes to cash flow, money, and government fiscal policy, we need answers. We need the elected representatives to understand basic economics, and we need to hold a tighter rein on those elected representatives. The current fiscal health of America is poor, solely because of the elected representatives and their bureaucratic minions. We must have a solution that protects America, and this solution needs every citizen involved and engaged.
© 2021 M. Dave Salisbury
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