Overpriced insurance coverage

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PostPosted: Mon Oct 05, 2009 10:49 am   Post subject: Overpriced insurance coverage  

Is it true that whatever insurance we get in the market is generally overpriced?


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PostPosted: Mon Oct 05, 2009 11:45 am   Post subject:   

That depends on your perspective, and the risk.



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PostPosted: Mon Oct 05, 2009 1:26 pm   Post subject:   

If it's all "over-priced", what would the normal price be? There are still thousands of carriers competing for business, especially now. That pretty much insures a lower/fair price.

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PostPosted: Tue Oct 06, 2009 2:33 am   Post subject:   

What exactly is "overpriced?"



I first of all have to agree that it's a matter of perspective. What's overpriced to one may not be to another, but that's obvious.



Insurance is a risk-sharing mechanism. It's meant to spread the risk of many through a pooling mentality. Similar exposures are lumped together into what are called "homogeneous exposure units." These exposures share similar tendencies and characteristics. For example, 16-20 year-old single male drivers. The similar characteristic they share is that they mostly suck when it comes to driving. Shocked



Insurers, in part, use the idea of homogeneous exposures and the law of large numbers to set their rates. Additionally, what's happened in the past is likely to happen in the future in terms of loss exposure.



What does this all mean? It means that in insurance, you generally deserve what you pay (for). Lousy drivers with terrible credit have horrible insurance rates. Good drivers with good credit have good insurance rates. What's the big deal?



When you say overpriced, I tend to think of something that a person pays in excess of an item's value, either actual or perceived. The price of insurance may suck...until you get into that at-fault accident where you hit the kid on the bike or you need that life-saving surgery or your house burns down.



So, in that sense, when I think of my three kids driving around like semi-lucid idiots, I think that my insurance is a bargain. Even though I've never had to use it with the kids...ya never know.



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PostPosted: Tue Oct 06, 2009 10:43 am   Post subject:   

great post ins teacher !



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PostPosted: Tue Oct 06, 2009 11:16 am   Post subject:   

Hi Teacher, you've touched an insurer's way of collecting facts from the past and then planning for the future when it comes to loss exposures. I'd also think that this idea gets affected by unforeseen facts like inflation, natural disturbances, global downturns etc. What do you think?


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PostPosted: Wed Oct 07, 2009 1:23 am   Post subject:   

Quote:
Hi Teacher, you've touched an insurer's way of collecting facts from the past and then planning for the future when it comes to loss exposures. I'd also think that this idea gets affected by unforeseen facts like inflation, natural disturbances, global downturns etc. What do you think?




While an insurer does use the past to predict the future, that concept can only go so far. In terms of things like inflation, many policies have built-in inflation protection meant to make sure the policy keeps up with changes in the cost of living, etc. Homeowner's policies regularly build this into renewal policies, life insurance policies can have a rider attached that increases the amount of coverage based on inflationary statistics, etc.



When considering things like natural occurrences, such as floods, hurricanes and the like, insurers know how to price coverage for these exposures, but they can't "predict" when they'll occur. The only known constant is that they will occur, but when and where is the mystery.



Regarding economic markets and associated downturns. You won't see an insurance company put a product on "sale" in the traditional sense. Not because they wouldn't, but because state rule prohibits the practice. Think about what kind of insanity would result if a carrier announced a "weekend special" on car insurance. ShockedVery Happy Are insurers affected by economic downturns? Absolutely. It's pretty well agreed that losses go up when the economy goes down; all you have to do is look at the numbers. Loss ratios tend to explode and have a direct correlation with the economy, especially in P&C arenas.



Can insurers raise their rates? Only with state approval and only if the carrier can meet certain metrics.



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PostPosted: Sat Oct 10, 2009 7:14 am   Post subject:   

When it comes to attaching life insurance riders based on inflationary stats, do you mean it happens without the insured even asking for it? Or is it upon requests from the policyholders that the carrier makes the necessary changes?


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PostPosted: Sat Oct 10, 2009 3:16 pm   Post subject:   

Quote:
When it comes to attaching life insurance riders based on inflationary stats, do you mean it happens without the insured even asking for it? Or is it upon requests from the policyholders that the carrier makes the necessary changes?




No, inflation protection is normally offered in the form of a term insurance rider to a permanent insurance policy. The rider will cost a little extra premium as normally the extra coverage (based on an inflationary measure, such as the Consumer Price Index) is added without proof of insurability.



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PostPosted: Wed Nov 25, 2009 8:20 pm   Post subject:   

over and under priced is a matter of opinion.



international comparrisons for some types of insurance are mostly worthless, so it comes down tot he domestic market. Prices are set via competition and it really falls on the consumer to do a little research and find out who will give them the best deal.



fortunately the internet has made it a lot easier to get quotes from various insurers quickly and easily, so if you really want the best value cover around it's not too hard to find out with - a PC, your zip code and a little time and your set.



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PostPosted: Thu Dec 03, 2009 6:11 am   Post subject: Overpriced insurance coverage  

Prcing of Insurance products is one of the most challenging job for any insurer. The price of any cover being introduced in the market depends upon a large number of factors starting with Risk Premium (based on average loss ratio in the past from similar kind of risks), cost of marketing, any profit which companies anticipates followed by most difficult task of adjusting all the calculations to meet the competition.



You may be surprised, but most of the time the rates offered are heavily discounted to meet the market requirements, which results into exterem pressure on the portfolios.



However, since one or two in hundred prefer claim under any insurance policy (luckily for insurers), for 98% people the product price appears to be higher. that's why most of the insurers reward their customers by offerring low claim discount or bonus in case no claims are preferred.



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PostPosted: Wed Jan 20, 2010 5:02 pm   Post subject:   

A few years ago, Metropolitan Life learned that if you "overprice" a product because of the color of someone's skin, you spend lots of time in court and end up paying something in the 8-figure range to make the problem go away.



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PostPosted: Fri Jan 22, 2010 4:41 am   Post subject:   

Here's a great moment for an economics lesson. There's a market for insurance, just like there is a market for anything else. There's a cost associated with insuring risks and that's the driving factor behind an insurance company's willingness to offer a product at a given price. There's also a willingness to accept the cost of insuring risks based on expected utility from having the risk covered, and this drives consumer receptivity to buying insurance at a given price.



Now, something truly interesting goes on in the insurance market that we don't usually get to see in all markets for all goods. The shear quantity of suppliers allows for a lot of discrete numbers when it comes to offering price.



For those who have made it through even a basic economics class, think back to the very basic supply and demand schedule, remember how at the left of the graph you had a supply schedule (with it's positive slope starting somewhere close to zero) and a demand schedule (with it's negative slope beginning at a point much higher on the y axis) and these two lines were no where near each other. This representation accounts for the people who would pay nearly anything for the good and the suppliers who can produce it for almost nothing so they could afford to sell it for next to nothing. Remember supply and demand schedules are the aggregate of the suppliers and demanders for the entire market for a given good.



If you didn't fall asleep, you might remember a seemingly insignificant concept known as "gains from trade." This idea is hugely important to out discussion. Gains from trade represent the huge discount demanders who are furthest left of the equilibrium feel they get when a given good sells at the market price, and the huge mark up suppliers who are furthest left of the equilibrium feel they are getting.



Now keep in mind that there is a group of people who are to the right of the equilibrium, both demanders and suppliers. Demanders at this point view the market price as over priced for the given good, and suppliers do not have the ability to produce (offer) the good at that price.



Now, there's a lot to be said about what goes into developing those supply and demand curves, but it's a lot more typing that I don't have time for at the moment. The simplest way to end this is to swing back to the suggestion that overpriced is a relative term. But the core point here is that with insurance, the suppliers will offer the product at their available price (they are price makers not necessarily price takers, which is the generally accepted view about those who produce a given good in a market economy). This means at times, suppliers of a specific insurance product for a particular situations, who don't really want the business anyway, often end up with demanders who look at the price and feel it is overpriced. Now when it comes to government involvement with certain goods, take for example mandatory car insurance, this creates a degree of coercion that operates contra to market economies.



Is insurance overpriced? No because utility is not universally the same for every person. With that in mind, there is no such thing as a good being overpriced in market economics, just the perception of some to consider it that way.

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PostPosted: Sat Jan 23, 2010 5:17 am   Post subject:   

Then again, on the other hand. I've never seen anyone receive a check after a loved one died who said, "Dang!! this is sure great, but I think I paid far too much money it."



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PostPosted: Mon Apr 05, 2010 4:24 pm   Post subject:   

I've been in the same situation a number of times, feeling that I've paid too much. But, then again, "too much" is such a vague term. It's nearly impossible to define. It's reminiscent of the price guaging at the pump...

Great information, all of you!

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