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Vacas Mugen | Buying insurance against an event with fixed probability, what should the insurance company's profit margin be |
I'm trying to buy $250K of coverage against an event that is known to occur with 10% probability. Thus, the expected value of this insurance is $25K. I'm getting a quoted insurance premium of $57K, although I am told that this is negotiable, but I should provide an offer. What's a reasonable risk premium for an insurance company to charge?
Additional Details
I'm trying to buy $250K of coverage against an event that is known to occur with 10% probability. Thus, the expected value of this insurance is $25K. I'm getting a quoted insurance premium of $57K, although I am told that this is negotiable, but I should provide an offer. What's a reasonable risk premium for an insurance company to charge?
Additional Info:
This is in fact basically hole-in-one type insurance. Equivalent to straight roll of a ten-sided die, and no attorney fees involved. Also, minimal claim verification is needed, so there is not much additional cost associated with that.
I understand that insurance companies have various overhead expenses, but on a per-policy-added basis, the incremental expense to the insurance company is minimal, right?
Doesn't that mean that I should be able to get this policy for not too much above $25-30K? |
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mbrcatz
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Well, it depends on a BUNCH of stuff. Is this like "hole in one" coverage? Straight roll of the dice, and if your 1 in 10 comes up, they just write a check? Or is there a possibility of attorney involvement, that would require a seperate payment of legal fees?
And who told you the event has a 1 in 10 chance of occurring? Form the numbers, it looks like it's a 1 in 5 chance.
Lastly . . .if you don't like that quote, and think the company is ripping you off . . . get a second quote from another market!!
Anyway, here's the breakdown of premium that you can be expecting: Policy premium, less 10% commission for the wholesale agent, less 10% commission for the retail agent. Claims department is going to run about 20-25% in their expenses, operating expenses (rent, employees, insurance, etc, another 40%, Governmental taxes have to factor in . . and at that level, the company could possibly be looking at reinsuring part of that amount - a $100,000 payout might have a significantly lower cost, if it would bypass reinsurance - whatever the reinsurer is charging would NOT be marked down at all. |
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David M
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Try answering your question this way....If your numbers worked out PERFECTLY, the insurance company would have to pay out $250000 for every ten policies it sold. That means if they sold each of them for $25000, they would earn $0! And that doesn't pay for any overhead or employees or taxes or any other insurance company expense. So let's say you need to take in 150% of premiums to pay for overhead....That would get you a premium of $25k plus $12.5k or $37,500. But there is still no profit here!! So let's add another 15% of premium for profit and you are now up to a $40,000. premium.
So that's the BASE premium...now here's the kicker....life is funny and so are statistics.....the event you are insuring against happens 10% of the time ON AVERAGE......That does NOT mean that it always happens every 10th time.....it means that it often happens 'about' 100 times out of 1000, or about 1000 times in 10,000. You know that flipping a coin is 50-50 right?? Well then, how come I just flipped a coin 10 times and it was 7 times heads and only 3 times tails? Try it yourself!
So your insurer wants to hedge against that great demon "Murphy's law"....that's why they have pumped the premium to $57k....see?? I think a fair counter offer would be about $49,000-0r $50,000.
Hope that helps...l |
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Bright Future Penguin
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I have to admit to being very curious to know what the specific event being insured against is. |
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2insure4less
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10% probability is very high in the insurance industry. $57k is reasonable. |
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taketwo
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it depends on the premium and underwriters. |
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Jason Koh
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Think for others ,if you will them and they are you?Every trade had it profit and risks.We should not be asking what margin profit ?You like you buy.70 cents a cup of coffee at Coffee shop ? 40 cent at worker quarter .Profit margin 40 to 60 percent. A cup of coffee costs average 30 cents which include coffee powder ,sugar ,milk, water..........can you said it high profit .How if noone or less customers?Negotiable yes but don't ask how much they earn. |
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