As from April 2013 my Journey in Investing is to create Retirement Income for Life till 80 years old for two over market cycles of Bull and Bear.

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This blog is authored by an old multi-bagger blue chips stock picker uncle from HDB heartland!

"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." - Dr. Alexander Elder

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Saturday, 15 May 2010

Insurance Companies Work for Shareholders, Not Customers

by Flexo on May 7, 2010.

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. (Createwealth8888: This is where the fine print that helps them to deny claims. Honestly, do you really spent your time and effort to understand and clarify this fine print?)

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.
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"Old men are fond of giving good advice, to console themselves for being no longer in a position to give bad examples." - François La Rochefoucauld


Createwealth8888:

Buyers beware - Read the fine print especially on Critical Illnesses claim.

We bought coverage for Critical Illnesses on good faiths and don't ever expect the insurance companies to pay on good faith as they are not your father or mother who helps to pour milk into your mouth as they exist to make money for their Management and their shareholders.


Use insurance wisely as a hedging tool and treat it as expenses.

It is where you have to ensure that you are first adequately covered by medical insurance and H&S for treatment expenses.

You tend to hedge more when you are low in saving and less savvy in investment in your early stage of life and progressively be able to hedge less when you have more saving and become more savvy in your investment.

Savvy in your investment and get better returns is a better hedge against all future expenses.

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