Insurance companies do really well out of rising interest rates. Insurance companies also get screwed by inflation:
An insurance company collects premiums from its clients and pays out if bad things happen. That’s pretty much it really. If it prices the risk correctly it profits, if it doesn’t charge enough it loses. But while that’s basically how insurance works that’s not all of it.
To understand how Berkshire Hathaway works we’ve got to add in time. Because, of course, those premiums get collected now – but the claims are paid out only if the bad thing happens, some point in the future.
That means the insurer gets to sit on the cash in between those two moments in time. Moreover, the insurer gets to invest that money between those two moments and the profits from that activity belong to the insurer, not the insured.
Why does this matter? Because Berkshire Hathaway’s “float” – the amount it gets to sit on, or invest – is near $109bn these days.
“Insurance companies also get screwed by inflation:”
I’m not so sure. My experience of insurance is that they find every way possible to wriggle out of paying, and one of the favourite methods is ‘You’re underinsured, so we’ll only pay out a %’. If you insure your house and declare its replacement value is (say) £200k, and it burns down, and its going to cost £250k to rebuild it, they then declare you are underinsured and therefore they’ll only pay 80% of the claim.
So it seems to me that if inflation is driving up the cost of repairs and renewals then unless the customer is keeping very much on top of the exact replacement cost of whatever he’s insuring and updating it every year then there’s a good chance they’ll be underinsured and the insurer won’t have to pay out any more than if costs hadn’t inflated. Plus of course in a time of inflation the customer will be under cost pressures too, and won’t be particularly keen on making sure he’s fully insured.
Shouldn’t this be listed under “elsewhere”? I seem to recognise the style.
Jim,
Why should an insurance company pay out the full amount of a claim if the premium charged was only designed to cover a lower sum assured?
@ Jim,
If the cost of rebuilding is £200k when you take out the insurance then the insurer will* pay out in full, but if it £250k *then* it is quite right to pay out only 80% of the claim because you have chosen to insure 80% with them and 20% with yourself.
Several insurers made horrible losses (most UK ones made significant losses) during the Wilson-Healey hyperinflation of the ’70s, resulting in some insurance companies and a considerable number of Lloyds’ “Names” going bankrupt.
*The court will tell them to do so if they don’t volunteer.
“Why should an insurance company pay out the full amount of a claim if the premium charged was only designed to cover a lower sum assured?”
Because in the situation I have personal experience of the insurer was asked at renewal to determine what the rebuild cost should be, and premiums were paid on the basis of the figure they gave, but when something happened within the insured period they then declared the householder was underinsured. On a value they had suggested themselves. When questioned on this they said that the insured sum they suggested was purely for indicative purposes and that the householder should employ an independent valuer/quantity surveyor to determine if it was correct.
As I said, they are robbing cunts. The idea that insurers ever lose out in any circumstances is a joke. They always manage to wriggle out of it somehow.
@ Jim
That is gross incompetence by the insurance company’s staff (not deliberate because the company would have collected a higher premium if it had got it right). As you used their figure you were acting uberrima fidei and they should have paid out in full: this should be case for the Financial Ombudsman.
We win as rates go up for lots of reasons. Inflation is however universally awful unless you have a job working for the state. General insurers (“non-life” as if they are defined by not being something else) hate inflation as it makes them look bad if they don’t pay or costs them more if they have an actual specific liability.
Insurers don’t need inflation to take advantage. Take my father. Crashed into by a lorry. Car worth £1100 according to the commercial insurer with an assertion and no detail. Simple web search shows identical car is at least £1500. On point of principle we are rejecting the offer and starting proceedings. Just for fun to keep his legal mind going in retirement.
Yes the local state run auto insurance company here has a lot of form for very low valuations when a car is written off, they are now complaining about the cost of claims going up as more and more people are getting lawyers involved in their cases as they are worried about being ripped off
Are insurers really so dumb?
《if you charge now for something you’ve got to pay for in the future you’ve got a problem.》
Why wouldn’t inflation makers like oil companies and grocery stores sell inflation insurance to inflation takers, like Berkshire Hathaway?
AndrewAgain, are you being disingenuous?
“Insurance companies also get screwed by inflation”:
Life Assurance companies also get screwed when the government nudge / push/ coerce / mandate the sheeple to take an experimental drug, which may, possibly, be the cause of an increase in excess deaths amongst those under 60 who aren’t expected to to die that young.
P&C insurers using inflation swaps to match their liabilities?
What a stupid idea!