Insurance companies make their money through risk mitigation approach. Out of these risks, such companies work on the human tendency of not seeking for service unless the situation becomes so unbearable. Over and above, the insurance companies make their mainly from the following:
- Investment income
- Premature cancellation of the policies
- Policy lapses
- Property valuation and write off
Before a customer finally signs up for some cover whether it is medical, dental, home, automobile or even life; insurance companies put in great effort to ensure the risk of ever paying out on that policy is as minimum as possible. As for the medical cover, they go a little further to consider some procedures as elective (and thus not covered) not just as a way of minimizing their risks but also persuading the customers to dig deeper into their pockets for higher premiums to the satisfaction of the companies.
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They introduce different tiers to cover different customers just to spread the risk. Such tiers include:
- Health Managed Organizations (HMO) which is cheaper for the subscribers but with less access to specialized procedures considered elective and certainly more out of pocket settlements expected on their part whenever they seek treatment.
- Private Providers Organization (PPO) is a more expensive network of doctors for specialized procedures but come with higher premiums footed by the customer.
In the past, whenever the economy was not performing too well, unscrupulous insurance companies on the basis of weekly hours logged in at work could quietly modify their customers’ tier assignment from the costly PPOs to HMOs even without notifying or consulting the customers. They could do this to maximize their profits by potentially denying coverage of specific procedures not under the HMO tier.
But overall, it has been observed that every year, insurance companies get to payout on around 3% of policy takers while the rest of the subscriptions remain under the control of the insurance companies as profits.
Since insurance companies bet on risk levels and chances of not paying out on a given policy, if say a company collects $10Million in subscriptions and spends $7Million on paying out claims, the remaining $3Million less the operational costs becomes their profits.
Most companies choose to utilize this money as capital to invest in property, government bonds, stocks and other hedge funds. The income they make out of this certainly contributes towards their increasing profit margins and also helps offset the claims as they are filed.
Premature policy cancellation
Suppose a customer signs up for the children’s college education plan, pays the monthly premiums for say 10 years and then chooses to bail out of the arrangement. The insurance company will gladly terminate this policy as requested by their client, penalizing the subscriber for pre-term claims and transfer the education liability back to the subscriber.
Meanwhile, in those initial 10 years the policy was current, the company received monthly subscriptions and diligently invested the money in other income generating plans where they may have already made their profits. These profits will be entirely theirs even though the investment capital could have come from the customer’s subscriptions!
By volunteering to terminate the cover, the subscriber indemnifies the insurance company from the initial liability having already contributed to raising investment capital for the company but ending up with minimum equity on his subscriptions if any. The insurance companies continue smiling all the way to the bank as they leave their previous client to manage his own risks.
Sometimes a customer may sign up for a preferred policy, pays in for some time and then for some reason, is unable to continue subscriptions. This may be as a result of loss of a job, death, divorce, and relocation to another country or just simply ignorance on the part of the subscriber
While there are custom tailored plans to cover job losses, others do not. And whenever a subscriber losses his income, the cash flow system will be adversely affected. Under the circumstances, unless the subscriber is already covered under the job loss option or perhaps had saved enough to continue supporting the monthly subscriptions, meeting his daily basic needs like food, housing and clothing becomes a higher priority than paying for insurance cover.
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And should such a client fail to make the agreed monthly subscriptions, the policy will lapse and he will ultimately lose the benefits he could have enjoyed under the cover. But even as such a plan lapses, the insurance companies are not famous for reimbursing the money such a client had already spent on them as monthly subscriptions.
Whenever a policy lapses, the subscriber always forfeit the premiums already paid to the insurance company which gets to keep it entirely as though the subscriber had no stake in it at all.
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