I used to work in insurance in a hurricane zone. Yes, claims hurt an insurance company, but right after the storm is also when everyone calls up and upgrades their policies. I would say its a wash, if not actually a positive. If 5 homes get knocked over by a tornado, it is pretty much free advertising to millions of homes in the region as it makes the news rounds.

Plus, if you're an insurance company in a hurricane zone, you carry a "megacat" (a catastrophic event insurance which is rather larger than most consumer grade policies, to put it mildly) policy underwritten by, most of the time, Berkshire Hathaway. If you sustain $1 billion in claims then you call up Warren Buffet and say "Sorry Warren, we just won our bet and will be needing those premiums back, and quite a bit more." and he'll say "Ah, shucks, guess I don't crush the market quite so thoroughly this year. Oh well, I still get to keep all of my winnings from investing the float in good years."

It doesn't matter to an insurance company how likely car crashes are -- that just determines what the company charges in premiums. All that matters is that the likelihood is well understood and that the company has enough customers to stay solvent.

Insurance companies essentially work by the Law of Large Numbers: that in a large enough number of trials, the average value should approach the expected value. In real world terms, if the chance of a house burning down in a fire is 1 per year per 1000 homes at an average cost of $200k each to repair (totally bogus numbers), then an insurance company can break even by charging a homeowner $200/year to insure the home against fire.

Over a large enough number of homes, that should be reasonably close to the actual amount they have to pay out. Tack on a profit margin, and you have a business model.

Edit: Fixed numbers a bit. Thank goodness I'm not an actuary.

Insurance makes money on float and usually loses money on insuring something over the long term. I can't remember the exact numbers, but GEICO might payout something like 103% (or 3% MORE than you paid them) over the term of your policy with them.

How do they make money? http://seekingalpha.com/article/419731-buffett-on-insurance-...

Basically they invest your premiums during the time you are paying them and make money off of holding your money. Then the other insurance agencies might lower their costs and end of paying out 104% (or whatever) of what you've paid in. This competition pressures the market to close the gap between what you can make on the float and what you can charge your customer, but there is going to be some gap and that is the profit margin.

If the insurance company can make a high ROI on the float, they can charge less in insurance rates and still make money.

Insurance companies usually lose money on underwriting.

However, GEICO is not a good example, because it is the exception to the rule. GEICO usually makes an underwriting profit -- often a very large underwriting profit.

In fact, all of Berkshire Hathaway's insurance operations make a long-term underwriting profit. Unlike GEICO, the reinsurers do not make a profit every year, because hurricanes and earthquakes are unpredictable. (Whereas car crash statistics change very slowly from year to year.) But averaged out over a long period of time, they make a profit.

This is the secret of Warren Buffett's success as an investor. He is essentially buying stocks on margin, at a negative interest rate.

Data collected from Berkshire Hathaway annual reports:

  2012: $680 million profit on $11,578 million float
  2011: $576 million profit on $11,169 million float
  2010: $1,117 milion profit on $10,272 million float
  2009: $649 million profit on $9,613 million float
  2008: $916 million profit on $8,454 million float
  2007: $1,113 million profit on $7,768 million float
  2006: $1,314 million profit on $7,171 million float
  2005: $1,221 million profit on $6,692 million float
  2004: $970 million profit on $5,960 million float
  Not broken out separately prior to 2004

This profitability streak is truly exceptional. As Warren Buffett pointed out in his 2012 letter, State Farm has made an underwriting loss in 8 of the previous 11 years. The insurance industry as a whole has made an underwriting loss in 37 of the previous 45 years.

I think you overlooked that in GTA we have a > 100-year-storm of destruction

In the game world, insurance companies wouldn't have predicted the level of claims.

I haven't played the game. If the game's premise is that there's a one-of-a-kind rampage going on that's causing all sorts of mayhem that couldn't have been predicted, then I agree that buying shares in an insurance company would be a bad idea.

But if the game's premise is that the mayhem is normal within the world, then insurance would be stupid expensive. But, assuming the market can bear those prices, insurance would be a good business to be in.

It's a game where getting into a fender bender with a cop car often results in hundreds of blown up cars, numerous car-jackings, and several crashed helicopters an hour or two later, but only if your character is involved.

I'm sorry to be so pedantic, but your math doesn't seem quite right. Should it instead be (1/100,000 chance of burning down each year) * ($200,000 cost if it does) = $2 per near expected damages?

Err, yes you're right. I was off there by a couple orders of magnitude :)

To stay in business, casinos need to be a bad deal for customers _as a group_.

Did I say casinos? I meant insurance companies.

Seriously, insurance is a bet on something bad happening. Usually it only makes sense to buy insurance for the equivalent of long-shot "lottery jackpots". Like a catastrophic health problem. Or like the damage you might do to other people and their property in an auto accident --- but probably _not_ the damage to your own car. i.e. Insure for personal liability calamities, but not collision damage if you could pay for it out of savings.

Insurance is accepting a small but certain loss to prevent a large and unlikely loss. Gambling is accepting a small but certain loss in the hopes of getting a large and unlikely gain.

They're related but opposite concepts.

The Casino, not the gambler, counts on a constant stream of money coming in with the occasional large chunk of money going out. Insurance companies operate the same.

Constant stream of money coming in with the occasional large chunk of money going out? Your description applies to almost every business on the planet.

Doesn't mean it isn't accurate. It is inaccurate to say that casinos and insurance are dissimilar in that regard.

If casinos find themselves paying out too often, they change the size of those payouts with respect to how much it costs to play, until they are back in the black. If insurance companies find themselves paying out too much, they raise their premiums. Same basic concept, the only thing that is different is the motivation of the customers.

Socialism is a lot more than a single economic exchange - its a system. Perhaps what they're describing is cooperative or risk-sharing. But its no more 'Socialism' with a big-S than its Monarchy. To quote Billy Crystal - I eat a burrito - I'm not Mexican.

Uh... okay. If you want to call it that, that is fine. Not sure how that is relevant though.

You know what's really socialistic? The systems inside any large company. You need a computer and a cubical? These things will be provided to you, in return for your work. Nothing reasonable is denied as long as your productivity justifies it, comrade!

"From each according to his ability, to each according to his need." -- Karl Marx. Not a misquote.

Err, that's capitalism.

Socialism's the one that thinks all men are born equal. Everyone gets the same computer and cubical. Productivity is irrelevant.

You might be muddling Socialism up with Communism (or Marxism).

"Ism's in my opinion are not good."

actually... no. Companies are still pretty capitalistic considering the owners/shareholders get all the major money out of it without putting any "effort" in. Though i guess socialism would be a like an employee-owned company where everyone gets a share of the total profit etc. Or where they decide as a whole what to do with the surplus (get a pool table, or heck even an indoor POOL!)

Marxism is not the only socialist ideology, nor the first. Tying socialism to Marx is a good way of restricting your view.

And since you make the explicit point that you're not misquoting: No, but the quote you give is severely out of context.

Marx very specifically did NOT believe that this would be the case for _socialist_ society, but for a well developed _communist_ society, and that in any case he makes the case that it is really a distraction.

The quote is from Critique of the Gotha Programme, a critique of a draft programme of the United Workers Party of Germany.

The full paragraph reads "In a higher phase of communist society, after the enslaving subordination of the individual to the division of labor, and therewith also the antithesis between mental and physical labor, has vanished; after labor has become not only a means of life but life's prime want; after the productive forces have also increased with the all-around development of the individual, and all the springs of co-operative wealth flow more abundantly -- only then then can the narrow horizon of bourgeois right be crossed in its entirety and society inscribe on its banners: From each according to his ability, to each according to his needs!"

This was part of Marx' criticism of this phrase in the programme:

'3. "The emancipation of labor demands the promotion of the instruments of labor to the common property of society and the co-operative regulation of the total labor, with a fair distribution of the proceeds of labor.'

Marx made the point that while this is desired endgoal in a communist society, the above programme point is largely meaningless in terms of practical policy for a revolutionary party that has communism as its goal, as the distribution of wealth can not reasonably be treated separate from the ownership and control of the means of production. Thus focusing on redistribution is effectively making an own-goal, playing right into the hands of the ruling classes and/or reformists by changing focus away from the necessity of restructuring society and the control of labor.

He goes on after the most famous part of the quote, to say:

'I have dealt more at length with the "undiminished" proceeds of labor, on the one hand, and with "equal right" and "fair distribution", on the other, in order to show what a crime it is to attempt, on the one hand, to force on our Party again, as dogmas, ideas which in a certain period had some meaning but have now become obsolete verbal rubbish, while again perverting, on the other, the realistic outlook, which it cost so much effort to instill into the Party but which has now taken root in it, by means of ideological nonsense about right and other trash so common among the democrats and French socialists.

Quite apart from the analysis so far given, it was in general a mistake to make a fuss about so-called distribution and put the principal stress on it.

Any distribution whatever of the means of consumption is only a consequence of the distribution of the conditions of production themselves. The latter distribution, however, is a feature of the mode of production itself. The capitalist mode of production, for example, rests on the fact that the material conditions of production are in the hands of nonworkers in the form of property in capital and land, while the masses are only owners of the personal condition of production, of labor power. If the elements of production are so distributed, then the present-day distribution of the means of consumption results automatically. If the material conditions of production are the co-operative property of the workers themselves, then there likewise results a distribution of the means of consumption different from the present one. Vulgar socialism (and from it in turn a section of the democrats) has taken over from the bourgeois economists the consideration and treatment of distribution as independent of the mode of production and hence the presentation of socialism as turning principally on distribution. After the real relation has long been made clear, why retrogress again?'

In other words: Marx saw the focus on redistribution as largely _missing the point_. The main issue, according to Marx, is the mode of production: ownership of the means of production and conditions under which people work.

Thus the systems inside any large company, no matter how much you "spread the wealth around" is a sideshow: Unless it alters the decision process, ultimately the distinct capitalist distribution of wealth eventually asserts itself. And just how many capitalist companies do you know where an objective measure of productivity, rather than hierarchy, is used to determine what is available to most employees?

There may be socialist ideologies that might fit your idea - various meritocratic systems, such as Saint Simon's original technocratic meritocracy, for example might be a better fit. But Marxist it isn't.

Insurance is the opposite of gambling. You take a guaranteed loss instead of risking a huge one. Not having insurance is a bet that nothing bad will happen.

If you can afford to replace everything you own out of savings, good for you, but most people can't.

Beyond that, given the perverse 'market' for health care in the US, even if you can (theoretically) afford to self-insure, the pricing mechanisms and negotiating power of insurance companies practically ensures that they can offer you premiums for less than your out-of-pocket cost for even fairly pedestrian services.

There are (or at least were when I sold insurance) products that costed very little (compared to an actual plan) that provided you with the negotiated price the insurance company would pay if something happens. If you can afford to self-insure, the best bet would be to buy one of these products and store the rest in the bank.

No clue if those things exist anymore with everything going on in the world of health insurance, though.

But you really can't afford to self-insure, even if you're young and healthy. There's always the small but real chance of getting a catastrophic illness and running up a million dollar bill.

Therefore, you really need to buy at least catastrophic coverage. And that's real insurance, not self-insurance.

Health insurance is complicated because for most people, it's so much more than just insurance. It's prepaying $300 a month so you don't have to pay $200 to visit the doctor once per year. No, I don't know why people do that. You're right that paying $100 a month for "please reattach my severed limbs" insurance is more affordable. Terminology be damned, that's possibly what people mean by "self-insured". They pay day to day expenses out of pocket.

Fortunately, the catastrophic insurance can be pretty cheap, if you choose a high excess.

You don't completely self-insure, instead you get a high deductible play ($5,000 - $15,000) - also called major medical or catastrophic insurance.

That way you insure the vast majority of things, but you are covered for the really insane stuff, plus you get the benefit of the negotiated rates.

> If you can afford to replace everything you own out of savings, good for you, but most people can't.

Exactly this. The advice I was always given is that if you can afford to replace x (whatever x is) if something bad were to happen, then it's better not to bother. But if you can't, and x is necessary for your life, then you need to accept insurance as a necessary evil.

> If you can afford to replace everything you own out of savings, good for you, but most people can't.

Not that it's relevant, but I can't. Anyway, I didn't say anyone should plan to replace everything from savings. My point is, whatever you _can_ replace from savings, don't waste money to insure _that_.

Please don't compare insurance companies to casinos. In casinos the odds are completely computable and known beforehand to everyone. Not so with insurance which deals with real life.

I'm naive on this topic, but wouldn't a high number of claims be either neutral or positive if said level is anticipated or consistent (as in the crime-ridden metropolis of LS or LC)? Ultimately, all policyholders will pay through higher premiums, and it'd be easier to make a profit (in absolute amounts) on high premiums since bumping up $1000 to $1030 looks a lot less onerous than $300 vs $330. As I said though, I'm naive on this, but I'm guessing only unanticipated high levels of claims would hit insurers hard.

Assuming efficient market, insurance industry will do best in more volatile conditions. The reason is insurance is essentially risk trading and they have the advantage of having access to more information and therefore can come up with more optimal risk trading strategies.

What scenario would be good for a car insurance company? If cars never have any problems, then no one would buy car insurance (perhaps other than the government-mandated minimum). So is there some happy medium where the insurance industry would thrive?

The ideal scenario is that the public hugely overestimate the risk of car accidents.

So a few high profile incidents like the ones caused by the protagonist are exactly what you need.

That's what reinsurance is for :)