Everyone Loves Insurance, Right?

Healthcare and insurance. The words just evoke anguish, discomfort and general anxiety, don’t they? I mean, I sure as hell don’t enjoy hearing those words uttered, let alone ponder the costs that are forked over every month from my salary. Yet they are still an integral part of our lives in the developed world. And, in case you haven’t noticed, the premiums are ridiculous — and getting worse. But why?

Let’s do a basic run down.

Insurance companies turn a profit by promising to cover the costs of a damaging event in exchange for a monthly cost, also known as a premium. This premium gets collected into a pool of funds that is contributed to by the clients — the premium payers — of the insurer, at which point funds get distributed, as needed, to cover the obligations of the insurer. Now, you can imagine that at some point this pool of funds may get so large that the insurer would be wise to allocate a percentage of the pool towards investment vehicles to earn a yield on the pool’s cash. If they don’t grow their funds through investment, they’re just losing purchasing power via monetary inflation. In that case they may as well be Pablo Escobar and have some of their cash literally eaten by rats.



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