Insurance companies have become extremely competitive, and as such have lowered the premium amounts offered to consumers to get the business, and to keep their existing accounts. That may not seem like the case to you because your premiums have gone up slightly. Inflation causes everything to go up, insurance is no exception. If you look at it from an overall standpoint, you can see that even though your premium went up, the amount it went up was far less than they should have.
Premiums are not the sole income for insurance companies. They are not even the main ways that they make a profit. Insurance premiums are only a little above the costs that the carriers pay out for expenses. If it were up to the premiums, alone, the nation would not have very many insurance options.
It has been shown in various studies that over fifty percent of the premium profits go to pay off claims. Around twenty percent of the income from the premiums goes to the costs associated with offering the policy to you, and holding that policy until you need it, or it has expired. It is estimated that for each dollar that the insurance company takes it, under ten cents will be profit.
That is not a great return for their services. It is extremely poor and would not be enough of a gain for any insurance company to keep their doors open. Luckily for them they have a second income, one that brings in around fifty percent of their profits. That source is investing. Money that they collect from you is being invested into the stock market.
Insurance regulations are strict and must be followed to the letter. They allow the insurance companies the ability to place the money that you give them, such as a premium on a health insurance policy, into investments that the government deems to be good. The investments must go into areas that allow quick retrieval; in case you must file a claim against your policy.
Volatility is defined by Forbes as the up and down fluctuations within the stock market that are larger than normal. When it comes to normal, though, the volatility of the market is expected. They are waves that need to be ridden out. If the market does drop out of the bottom insurance companies could be the first to be affected, and they could become the first causalities in the fallout.
Stock market volatility can affect the insurance market in two very distinct ways.
- Short Term Funds-As the market surges forward the short-term funds that the insurance companies have invested can create a healthy profit. They can also produce a substantial monetary loss. This is since the reserves held by the carrier are actually the funds that you have paid them to cover your insurance plan. The person in charge of investing in the market for the insurance company will always allocate more funds then needed into the accounts to allow for the volatility of the market. However, in the end no one can predict what the market will do. Insurance carriers could be pushed into bankruptcy fairly fast.
- Interest Rates and Stocks-when interest goes up throughout the industries, the stocks themselves will go down. A stock that goes down means a loss for any companies that have invested in it.
As you can see insurance companies rely on the stock market to make most of their profits. A volatile market can be disastrous for them, leaving you with no coverage and no idea how things went out from underneath you so fast.