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Insurance Companies Work for Shareholders, Not Customers

This article was written by in Insurance. 29 comments.


The entire concept of insurance, particularly public insurance companies with shareholders, is backward. If a company is to survive year after year, it has to make money for its owners. In the case of public companies, executives answer to the board of directors and the shareholders.

The goal is, of course, to make money for everyone involved.

Here is how insurance companies make money, reduced to the absolute basics:

  • Collect as much as possible from insured policyholders in the form of premiums.
  • Pay out as few claims as possible (but enough to avoid regulatory scrutiny) to policyholders.
  • Profit.

An insurance company that pays all legitimate claims could not survive in a free market economy. To compensate for paying more claims, the company would be forced to raise its premiums, and would lose its business to less expensive insurers. In order to increase profits and keep shareholders happy, the company must deny legitimate claims.

When you battle with a publicly-traded insurance company that doesn’t want to pay your claim, it is trying to earn another fraction of a cent per share. You just want the company to honor your insurance agreement in exchange for the premiums you have been paying.

It makes more sense for an insurance company to exist as a mutual company, where the policyholders (customers) are the owners. With this type of structure, the shareholders and policyholders don’t have competing priorities. Claims can be paid, and customer-owners will be happy. When there is a surplus, the mutual company distributes the excess money to its customer-owners. This is clearly a better way to operate for all parties involved.

Mutual companies tend to demutualize, or go public, to get access to more capital from millions of happy investors. It’s at that point the company no longer works for its customers, it works for the huge institutional investors and to a lesser extent individual shareholders. While policyholders will have their mutual shares converted to stock shares, they will no longer be the primary focus of the company.

Public insurance companies are the only companies that improve their business by not providing a service to their customers. While everyone jokes about cable companies, they provide customer service by making sure you’re getting hundreds of channels all the time. They may not show up at your door to fix problems, but there are hardly any problems. If a cable company categorically refused to deliver service despite charging its customers every month, it would go out of business; yet, this is exactly how public insurance companies must operate in order to succeed.

Published or updated May 7, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 29 comments… read them below or add one }

avatar Terry

I had a small ($15K) whole life policy with Met Life years ago and got a tiny windfall in stock (about $750) when it demutualized.

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avatar ross

There’s a line… it may not be perfectly accurate to say that they improve business if they treat customers poorly. If customers are treated too badly, they can change companies and take their premiums with them. The problem occurs when people have no choice because they’re locked in by an employer, the state, or there are issues that may make you uninsurable somewhere else… basically wherever competition is stifled. Taken to one extreme, some may realize that insurance isn’t worth paying for.

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avatar ctreit

Customers must at least perceive that they are getting some service from an insurance company. Otherwise they would go out of business. To use your example, if insurance companies were cable companies they would display a static picture on the TV screen and point out the awesome stability of the picture which customers are supposed to love. – Unfortunately insurance companies are not the only companies in the personal finance space that operate like this.

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avatar Apex

You are starting with the basic premise that denying legitimate claims is just going to happen in the system and if they don’t do it they will be out competed. Laws and regulations exist and more can be passed if they aren’t working. It’s simple contract law. If they deny a legitimate claim they will have to reinstate it. If that is not happening in practice then there is a problem in the system. If the system makes it too easy to do then the laws can be changed to make it such that the burden of proof rests on the insurance company to go before an independent or govt sponsored insurance review board and present the case for denying the claim rather than forcing the customer to prove its valid. Many things can be done if they are denying legitimate claims and the laws are not working well to stop it.

But lets be clear, its illegal to deny legitimate claims. And if everyone is doing it that doesn’t make the argument valid that somehow insurance operates on the notion of denying legitimate claims.

And there is nothing unique or special about insurance companies with respect to this issue. Every company or industry can attempt to raise its profits by engaging in practices that short change their customers.

I am not trying to defend businesses or CEOs or public companies. There is plenty of fraud and corruption and greed to go around. And I in favor of putting the screws to everyone of them. But there just isn’t anything unique about insurance compared to any other industry.

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avatar Luke Landes ♦127,475 (Platinum)

Denying legitimate claims might have been a bit strong — fighting borderline (and some legitimate) claims might be a more appropriate description. Not every insurer does this, and those that do don’t do it all time, but you can be sure it’s happening. There is a good chance the customer will roll over and decide it isn’t worth the fight, even though the claim should be paid.

And I do think it is if not unique, a rare situation. The priorities of the shareholders and the priorities of the customers are in direct conflict. Consumer retail, for instance, is the opposite. The customer wants to buy a product and the owners want the company to sell it, not to hold onto inventory. Everyone gets what they want in a successful consumer retail model.

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avatar Apex

I believe you are correct that it happens. And I find it disgusting. And I think the laws should be very harsh on the practice. Just like DWI laws I think they are far too weak. They need some real teeth. But in a proper regulatory environment with adequate competition, freedom of choice and available information, I don’t see anything particularily special about insurance companies that means they cannot operate effectively as for profit companies. They just need to have the hands chopped off when they are in the cookie jar instead of getting their wrist slapped and a lot of problems would just go away.

And you do make a good point about the conflict that is not common among other industries. Other industries still have ways to raise profits by hurting consumers (misleading marketing and selling practices, selling them crap add ons at 1000% markups that they don’t need, using substandard materials and passing them off as high quality, etc, etc, etc.) So I certainly don’t think retail companies are at a loss for ways to allow greed and corruption to lead them to make decisions in favor of stock holders that are not to the benefit of consumers. But you are probably right that it is more front and center and direct to their business model with insurance companies. Which brings me back to my first point about putting in place laws and regulations that kick them where it counts for doing it.

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avatar jim

I have Amica which is a mutual company. We actually pay higher premiums for them so its not saving us money. But the service is excellent.

I don’t think you can assume theres any generic rule that for profit insurance companies systematically deny claims in order to increase profits. Insurance companies are regulated by law and they can’t simply arbitrarily deny claims or they’ll face legal repercussions. Even if they can get away with denying claims legally it would cost them business due to losing customers. A business has to provide the services it charges people for or it won’t remain in business for long.

Mutual insursers can certainly have an edge over for profit insurers but an inefficcient mutual insurer could waste more money and actually provide worse servcies and cost more. An efficient for profit company can out perform an inefficient mutual company. Theres something about being a non profit company that can cause a lack of incentive or competitive drive at the company. Theres no shareholders pushing you to make a profit every quarter so therees no big incentive to keep costs under control.

State Farm is a mutual company and they had premiums of $32B and paid out claims of $22B. They spent another $11B on expenses and administrative costs. Thats a $1B loss before their investment returns. Progressive is a publicly traded company that took in $14B and paid out $10B in claims and had a $1B profit. They both paid out ~70% of the premiums in claims. Progressive had lower admin and expenses and took a profit, but State Farms expenses were higher and showed a loss. State farm has better rating on JD Power than Progressive so the difference may be in its level of customer service.

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avatar Apex

@Jim,

Great balanced comment.

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avatar Luke Landes ♦127,475 (Platinum)

Good example, and I can personally attest that the money within a company often flows freer when the company doesn’t need to report its financials to the public. Accountability to shareholders and the SEC is not a bad thing, in general, and it leads to cost-cutting. I definitely see that as a benefit — from a shareholder’s perspective.

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avatar mrtrend

I constantly have to fight with my insurance company Great-West, especially since Cigna bought them. It is often small things, like claim from an in-network specialist being processed as out-of-network instead, which means a 40% co-insurance out-of-my-pocket instead of 20%. I have to call them, sometimes 2 or 3 times, to get the error corrected.

I can easily see that this same “mistake” repeated to many customers will result in higher profit for the insurance company. First the customer has to realize that a mistake was made. This is not always obvious with all the different copays, co-insurance and deductibles depending whether the care provider is in or out-of-network, primary or specialist care, inpatient or outpatient. The customer must be fully aware of its benefits to be able to detect the mistake in the first place. Then the customer has to bother calling the insurance companies, often multiple times, to succeed in having the mistake corrected.

The only way I could change insurance company is if I change job, which in itself does not make a lot of sense in our so-called free market. Going without insurance or getting my own private insurance policy are options that not many people can afford.

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avatar Evolution Of Wealth

It’s also important to make a distinction between the types of demutualization. There’s a loophole where an insurance company can demutualize by forming a mutual holding company, banks are notorious for this. They can still claim to be a mutual company but their structure is that of a mutual branch within a stock company that is owned by the holding company. This means the insurance piece of the company is the only thing that is remotely close to mutual but they have to answer to their holding company not the policyowners, as in a true mutual company. Plus it can have a drastic effect on any dividends policyholders were looking forward to receive.

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avatar Juggler314

I don’t think this “An insurance company that pays all legitimate claims could not survive in a free market economy.” is an accurate statement. Generally an insurance company should be doing it’s research and making a relatively accurate guess as to how often events will occur and should be charging insurance rates that cover that. If you properly structure your fees then it will in fact cover all legitimate claims.

Lets use an example…there’s a 1 in 100 chance that something bad will happen to you over a 5 year period, if that bad thing happens to you, you get paid $10,000. So if 100 people all pay in $20/year that would be a total of $10,000 contributed and, theoretically, 1 person would cash in when that bad thing happens.

So what they really should do is charge everyone a higher premium, maybe $22 or $23/year, and take the extra and put it aside for the times when the bad thing happens more frequently than average.

This is how insurance on fairly predictable events works.

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avatar Holly

I have had loads of trouble just trying to get my FSA claims reimbursed. The company is holding our money and makes it a complete circus for us to try to get it back! Their excuses range from never received the faxes, the receipt cannot be in the form of a credit card statement, a signature from the doc is needed (even though there is a complete bill of sale attached), to you need to write the word “braces”, not “orthodontics”, since “orthodontics” is too general! I would think writing the word “braces” would be too general! This is just a sampling of what we have been put through, and it’s only May!

Anyway, each time the claims are denied it takes two weeks for me to find out it was denied, I have to re-send the claim, wait another two weeks to find out it was denied, and on-and-on-and-on.

One can see the motive behind this insane practice: the longer they hold on to OUR money, the longer they can have those dollars on the books. I have looked up complaints about this co. and even its own former employees are saying to stay as far away from this company as possible! Coincidentally, all of the good reviews come from posters who live in the city and state of the company’s home office. Something is rotten in the state of Denmark.

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avatar Matthew

I was very surprised by the attitude of this post, and it almost makes it seem like the author just got off the phone from dealing with a denied claim. The basic premise that an insurance company must deny legitimate claims to be profitable is ridiculous. These companies are in the risk management industry. Each company uses their own data to judge risks and price their products accordingly. To assume that they can only make profits if they don’t provide the service they are selling is ridiculous. If they continually didn’t pay on claims, customers would naturally migrate to companies that did. One of the biggest selling points years ago in the insurance industry was the financial strength of the company selling the insurance. Now, we all assume that the government is guaranteeing everything similar to FDIC and that every company is equal. I’ve only switched insurance companies once in my driving life, and that was based on price and service. I happened to move from one mutual company to another, but if I have to move again, I am likely to go to Geico since they offer great rates and service in my area.

To get to the heart of the matter, insurance fraud is a legitimate problem in 2010 and companies have a right to ask for legitimate documentation to support claims that are made. If they paid every claim that was made legitimate or not, then I agree that they would be in an unsustainable business model. My anecdotal experience has been that some people have the unrealistic expectation that if they have a problem that they should be able to call and say, “XYZ happened, pay me a lot of money today.”

Along the same logic, you could say Target is not helping their customers because they have taken a hard line against returns. The company is notorious for their strict return policy. However, it was instituted to stem the massive tide of returns. Did you know that on many shopping days almost 10% of items bought at stores like Target are returned? However, Target has knocked this number in half by requiring the customer bring a receipt and prove the item was in fact bought at Target within the last 90 days.

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avatar Luke Landes ♦127,475 (Platinum)

Although I have never had problems with an insurance company, my anecdotal evidence suggests there are many people who, although having legitimate claims and supporting documentation, have to fight with their insurance companies to pay legitimate claims. Insurance fraud is a big problem and it is right for companies to be vigilant, but the companies have power and strength to fight the customers and win when customers don’t want to fight back.

The Target analogy doesn’t apply. Returns are not the primary business of retail. Very few customers, as a percentage, return items, though a good return policy is a part of customer service. Making and paying claim is generally the only major interaction between customer and company — not akin to returning an item at Target.

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avatar megscole64

I think we can apply this line of thought to ANY company. If all a company is focused on is the bottom line, and not providing a good/needed service and taking care of their customers, then they will do everything they can to increase their profit – including treating customers badly. That’s just bad business all the way around. I just recently started working for an AWESOME company – Aflac. Yes, they need to make a profit and reward their employees and share holders. But they pay out a TON of money in claims every year and my goal as an agent is to help people file their claims properly in order to be approved – I am not being trained to look for loop holes in order to deny claims. Even people who have worked there 10+ years still are excited and enjoying working for the company – and their goals are also to help policy holders. I’ve already seen several people who’ve come into our office to get help be taken care of in ways that probably would surprise people.

It bugs me when such sweeping generalizations are made about any company, in any industry. There are rotton apples anywhere and it is our job as consumers to avoid those, report them, and work with reputable, respectful, and ethical companies as much as possible. (Aflac has been ranked one of the most ethical companies in their industry many many years running.) I don’t think the government needs to be involved nearly as much as it is right now. Consumers need to take care of themselves – that’s why there are consumer groups out there like Consumer Reports. Educating ourselves as consumers is our responsibility. Then if a company is dishonest, the law can come in (obviously we need SOME regulations…just the amount we have now is suffocating).

My goal as an agent is to help people. Truly, that is where my heart is. I was a policy holder of Aflac for 8 years before I started as an agent and have always appreciated my policies and the peace of mind they give me and my family.

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avatar Luke Landes ♦127,475 (Platinum)

I think you’ve mischaracterized the generalization. I’m not saying that all public insurance companies are bad, just that they’re looking after their stakeholders, and in doing so, work against the customers. This generalization is similar to saying all cars are designed to get an individual from point A to point B. Different cars are designed differently, are marketed differently, and appeal to different consumers.

Some of the customer-facing employees in the insurance industry are the friendliest people I know and are not out to take advantage of customers in order to make the company more money. It’s just often a tug-of-war between the priorities of the customer and the priorities of the owner/shareholders — moreso than in other industries. And I’m not the only one who sees this; for example, many executive-level individuals I’ve talked to *in* the insurance industry and in other branches of finance have agreed.

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avatar megscole64

I just think that if a company ONLY looks out for the bottom line then they will not be successful. A company’s #1 job IS to turn a profit. Without a profit there is no room to grow, hire new people, share the windfall with share holders and employees, etc. Profit is what is required. I think that company’s who do not produce a profit are the ones who are neglegent (i.e. GM, and government).

Things are all connected – in order to make a profit (long term) a company needs a good product that is needed or wanted…a company needs to treat customers well. Otherwise customers can go somewhere else or just decide they don’t need the product. That’s why government services drive me crazy – there is no ‘other’ place to go when you have to rely on gov’t (i.e. when gov’t provides utilities like garbage or sewer…and they won’t allow you to go with a private carrier…that’s wrong). There are plenty of ‘other’ insurance companies you can generally go to (and there’d be even more if gov’t would allow actual competition – especially across state lines).

Insurance isn’t any different from any other industry and I guess that was my point before. I don’t think it’s any more/less of a tug of war than any other industry (coming from the investment industry…but I see it in many other industries, even not for profits where they aren’t there to make a profit but still have to run their “business” – people get turned away). ANY industry is going to want to maximize profits (as they should) and reduce costs – including the cost of fraud. Fraud is going to occur in all industries, though it is a huge problem in insurance.

If a customer has issues with being denied with an insurance carrier, there are legal ways to file complaints, including state Insurance Commissioners. If a policy holder isn’t committing fraud and have a legitimate claim then they should take their case to the commissioner.

The idea that insurance companies ONLY work for share holders, not customers is my biggest issue with this post. The post itself isn’t necessarily wrong, but in my view it is unnecessarily “targeting” insurance companies, when most companies have the same focus.

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avatar Adam

what’s wrong with a company trying to make a profit?

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avatar Luke Landes ♦127,475 (Platinum)

In general, most companies make a profit by providing a service to customers. In general, insurance companies make a profit by denying a service to customers.

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avatar Ryan@TheFinancialStudent

Nothing…except when people die because the insurance company refuses to pay.

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avatar megscole64

I’m sorry…when has anyone DIED *because* the insurance company has refused to pay?!?! If someone is sick enough to die then it wouldn’t have mattered if the insurance company paid or not. A hospital is not going to turn you away and NOT treat you. It is just not logical to think that an insurance company’s denial *causes* you to die. Ridiculous.

Sure someone can go bankrupt if they can’t afford their medical bills, but show me a situation where someone has literally died just because their insurance company would not cover treatment. My mom works in the medical field and if someone was going to DIE without treatment, they’d get the treatment regardless of insurance.

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avatar Ryan@TheFinancialStudent

http://insurance.families.com/blog/insurance-company-refused-to-cover-than-reconsidered-too-late

http://articles.latimes.com/2009/jun/17/business/fi-rescind17 (doesn’t say anyone specifically died, but still, they praised employees who terminated “customers” with life threatening illnesses.

Yes, anybody can go to the hospital for EMERGENCY treatment. Once you’re stable, you’re out the door! Chemo, HIV drugs, transplants, etc. are not given out like candy. If you can’t pay, then you don’t get them.

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avatar megscole64

And those are really lame policies. There are LAWS that say when a person can/can’t be dropped though. It’s not just willy nilly. I think my state (Washington) is particularly strict with companies.

There ARE charities and organizations out there who work with people to get their treatments covered. People raise money to help. There ARE ways to get help.

And you know what? Life isn’t fair. Not everyone is going to survive…and actually we are ALL going to die eventually. No one is guaranteed anything and insurance is not a right.

avatar Ryan@TheFinancialStudent

Life’s not fair?

Is that a way to say that rich people deserve to live because they can pay but those without the means are expendable?

After all, everyone dies eventually. So what if it’s 20, 30, 40, or 50 years early.

Anyone who thinks medical insurance companies actually care if their (sick) customers survive is kidding themselves. The “need” for growing profits makes deaths and denials a good thing for the company.

avatar megscole64

You misunderstand. It doesn’t matter how much money you make, life is just not fair. It’s not meant to be. It has nothing to do with your social status or lack thereof. Sometimes crap happens, regardless of how much you plan or prepare. Even those with the very best insurance will die – sometimes early and sometimes after a long life. My father had insurance and that didn’t help him get GOOD care that should have caught his pre-cancer, which turned into cancer and killed him at 36. Insurance does NOT equal care.

My point was that insurance is NOT a right. Insurance agencies are private companies and yes often look to cut costs anywhere they can. They are private companies and that’s their right. Does it suck? Yeah. Even the government denies services to people who utilize their “public” options (including my mother in law).

But some companies ARE better than others and that is where the market can come in and customers can choose. Maybe if we had fewer regulations (i.e. allowing across state competition) and more choice companies would have to compete harder for our business and therefore treat us better.

avatar Uncle Sam's Brother

You guys miss the point. What the writer is saying is that insurance companies are like casinos and they are betting that you won’t make claim. if you do they make things difficult .
With profit insurance are scams and the insurance companies make the most money out of them.They take your money to bet in the casino and hope to win to pay you some bonus. They are not in a hurry. They got plenty of time to place on the bet which gives them 99.99% chance of winning. The problem is most of the winning goes to pay fat bonus for the ceos and shareholders and the not the policyholders

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avatar Financial Samurai

Insurance companies is actually one of the toughest types of companies to model. They have a tough time matching liabilities as well.

USAA… that is my #1 insurance company, and they are always rated #1 in customer service. I believe it!

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avatar Donald Wakelin

Would this not also apply to the “education-for-profit” business as well.

You have a fixed income stream and the only way to improve profits is to reduce the expenditures on services/infrastructure (teachers and books/buildings). I can see no scenario where the income stream increases when you produce a better outcome. It might actually decrease (better results for less money.)

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