Earlier quoted context omitted.
You're probably right. From my vantage point (in an independent agent insurance office right now), the easiest way to shrink UW is to make it ALL run by independent workers (e.g., agents). The irony of this, though, is that the quality of the underwriting risk assessment can suffer, meaning premiums will often be underpaid relative to statistical risk, and create more problems if enough of them push through. Another…
Ignorant but curious questions Do insurance policies get packaged and sold as financial products, or are they re-insured on the backend but continue to be held by the originator? Related, at what point of policy origination/reinsurance are standards audited and applied? I.e. if I originate a mispriced policy, where does that get noticed/rejected?
I have my own essay that tries to summarize it[1], but the entire idea of insurance is to work with pure risk:
- Speculative risk is when you might gain from big events (e.g., VC) - Pure risk is when you will only lose from big events.
The entire job of an insurance company is straightforward: take a little bit of premium calculated by actuarial data (historically represented as a table), then pay out large checks to the people who have an unlikely event.
I have a prevailing axiom that 3-10% of the population makes it difficult for the rest of us, and insurance gets complicated for that reason:
- people lie about claim damages - claims adjusters sometimes find legal ways to not pay claims - actuarial/legal framing can allow non-coverage of something that ought to be covered in good faith (e.g., driving your car out-of-state)
Now, that's the POV of the insurance company, which sets some context I wish I had had.
The POV of the party seeking insurance is that they're transferring pure risk, then paying rent to the insurer for it. It's possible to recurse this, and an insurer can become the insured by packaging up a bunch of risks and hand it off to other insurers for a price. I'm not THAT knowledgeable, but it wouldn't surprise me if that's what insurance orgs that took on too much risk actually do relatively often when they got a bit ambitious.
The tech world could actually learn a thing or two additionally from insurance. The secret to a functional insurance company with a liquidity issue is to, effectively, do nothing and wait for customers' insurance premiums to replenish the money supply. "Do nothing" is the exact opposite mantra of "Move fast and break things", and there's a time/place for both!