Fun with property/casualty insurance numbers

As I wrote previously, around 9:45 pm on July 20 there was a sudden roar and the whole house shook.

Turns out the 115 year-old oak had dropped a thousand-pound limb twenty feet onto the 115 year-old front veranda, destroying a substantial portion of the structural roof and pile-driving a section of the half-height porch wall into the soil. Estimates from experienced, reputable contractors totaled around $135,000 (including a $45 finch feeder, now with an acute case of Peyronie’s disease).

Checking my homeowner policy, I found: a) premiums had been paid in full b) inflation rider had been purchased c) I had also bought the ‘replacement value’ rider as opposed to the ‘typical construction’ default, allowing for reproduction of, say, the custom 1906 millwork and d) the total insured amount was multiples in excess of the damages (albeit with a ~$4500 deductible)

(Also, within the eleven months prior, I had had an experienced, very well-regarded, certified arborist evaluate and thin the tree as necessary…and have the paperwork to prove it. So, don’t even try the Policy Holder Negligence argument)

Finally, it turns out there’s something called “sudden limb drop” or similar, where mature oaks and elms during periods of heat stress may without warning autoamputate a perfectly healthy limb. The science as to why is being debated (increased ethylene levels leading to a weakening of intracellular bonds?), but the fact is that the phenomena exists. And, it certainly fits in with the finding that the downed limb looked perfectly healthy: no rot, healthy green leaves, hundreds of developing acorns.

So I filed a claim the next morning with the insurer (left nameless here as I suspect they’re pretty much interchangeable. This one is a very large firm, with presence in I think each of the several States and which insures homes, autos, small businesses, and Farms)

The adjuster – a nice young man, recently transferred here from another state, and stationed a two-hour drive from here – was out within a week, and after walking around, measuring, photographing said he saw no issues with the claim being straightforward, that my chosen contractor was already on their “approved list”, and should be processed promptly. As I’d already cut an out-of-pocket check for the >$2000 emergency cleanup, he additionally said that there shouldn’t be an issue in rapid prompt reimbursement for this item.

…tomorrow marks two months, and despite several calls and emails up the food chain, the company is silent except for asserting that it’s “under review”. (The hapless adjuster has said “Sorry!” so many times that I have silently dubbed him the Sorry Excuse)

So, here’s my Macroeconomic take as to the incentives for such lousy service, from an email I sent a friend:

"…here’s a 2021 review of US homeowners insurance profit/loss:…

The magic number here is the “combined ratio” - basically, monies in vs monies out. A CR of 99 or less means you’re paying 99 dollars (in claims paid + overhead) for every $100 in premiums collected; a CR of >100 means you pay out more than you collected, and can thus gnash teeth/rend garments/loudly complain of going broke/hire lobbyists.

This is of course disingenuous (why would anyone stay in the insurance business if there was no profit?)

The proverbial elephant in the room is that insurances are prepaid, typically for a year. Thus, the company on average has six months between money in and claims made. If payments are routinely delayed 3 months after claim, then that’s 9 months free use of customer cash.

AND since it’s a perpetually-renewing wheel, if you take in 120 million dollars a year in premiums, at any given moment you’ll have 60 million (more like 90 million) invested - the return on which is all profit. Since you can pay March claims with premiums received (from other customers) in April, you’re not restricted to investing this 90 mm in exclusively short-term instruments either. Put them in a longer-term mix of securities projected to return, say, 6% after inflation, then your after-inflation profit can be expected to be 6% of (60 to 90) million dollars, or 4-5 million dollars. That’s at least 4% net on the 120mm you collected even with not one dollar in underwriting profit.

Say the Portland metro area (3 million population) has a half-million homes, each at $2000 annual premium. Remember that HO insurance not optional: if you have low equity in your home, the bank will force you to buy it or else foreclose. That’s forty to fifty million dollars annual profit. Just Portland, just houses. Add small businesses. Add cars. Add Seattle. You get the idea.

(Also, note the enviable absence of a Bad Debt line: no such thing as a customer refusing to pay. No cash, no coverage.)

Finally: all of these guys buy reinsurance. Someone (e.g. Warren Buffett) says, I’ll cover any single incident that costs you over a billion dollars, up to ten billion, for an x million dollar annual premium, paid in advance - in essence, a ten bb policy with a one bb deductible.

The X million premium is fairly high, but the insurers will pay it in order to get that risk off the books. The reinsurers will write it as they take advantage of uncommon payouts vs the time value of money as mentioned above. There are comparatively few reinsurers…the trick for them is the discipline needed to walk away when competition depresses premium rates. Those are the companies left standing after a real supercat year. (There are apparently old reinsurers and there are bold reinsurers…but there are no old, bold reinsurers)

Carefully done, it’s a lucrative business excepting those years when you lose a lot of money. Think: casinos. Notoriously profitable, unless run into the ground by an orange moron.

That’s the P/C insurance games as I understand it (you did ask).

Wait, there’s more: on looking back on my own insurance claims over the years: not much. I went through a period a few years ago where 19 year-olds seemed to rear-end me a lot (fortunately at 10 mph), but that’s about it. Those were handled promptly.

So in thinking about incentives: were I in charge of cynically setting policy so as to maximize shareholder returns while at the same time not shrink the book (which would trash the year’s profit very quickly, as the hypothetical $90mm above would quickly drop to $80mm during the same time I was paying out $90mm in claims) I would:

  1. promptly settle small-dollar claims (say, less than $20K or whatever accounted for the majority of claims by number, allowing the high majority of policy owners to be satisfied


  1. obfuscating as long as possible on the small minority of high-dollar claims (the majority of claims by total cost),


  1. ultimately paying these just rapidly enough to keep the state insurance commission off my back, much.


  • suppose, as above, you take in $120mm/year in premiums from one smallish metro area, and pay $120mm out in claims
  • 70% of claims by total cost are high-dollar claims, or $84mm
  • you routinely delay payment from 30 days to 90
  • your portfolio returns 8%/year after inflation, or 0.67%/month
  • then your bottom-line net has just increased by 1.3% of $84mm, or a million dollars
  • so from a corporate standpoint, the stubborn silence I’m receiving now is a Heckuva Job (and presumably worth a lucrative performance bonus of, say, $10K, or a little over 1% of the profits Distict Adjuster Brownie generated by simply not picking up the phone)
  • all without irritating more than a tiny percentage of your clients, thus maintaining the all-important book

still out of pocket $2200 cleanup, a bird feeder, and enormously grateful I have a very experienced, well-established contractor (who is used to this nonsense and who has firmly stated that he views hassling the insurance company for payment is his job, not mine)

(Open question for the board: when should I drop a dime to the state insurance commissioner?)



No mention of you getting a lawyer to write a letter? Or did I miss that part?

1 Like

(Open question for the board: when should I drop a dime to the state insurance commissioner?)

When your contractor tells you too?


(Open question for the board: when should I drop a dime to the state insurance commissioner?)

Now is a good time. It depends on the state though. In some states the insurance commissioner is a stooge for the insurance companies. In other states they do their job as consumer advocates.

But your post hit the nail on the head: Insurance companies don’t make money by paying claims. They make money by not paying claims.

I would be in touch with the state insurance commissioner after 60 days. I had a very small claim years ago ($411) that went on for 4 months until I threatened contacting the insurance commissioner,I was hand delivered a check in 48 hours. Just a dis reputable company.