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.
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.