WHAT? Are you telling me that the insurance companies barely make enough money from the premium to pay a claim?
This unique situation allows insurance companies to invest that money while it’s not being used. Huge profits can be reaped, or lost, as a result. This is exactly why Warren Buffet formed the Berkshire Hathaway Insurance Company…so he could generate capital to invest in the stock market.
In fact, insurance companies can knowingly charge too little for insurance policies and plan for an underwriting loss if they believe they can make a profit from investing the money they receive before having to pay claims. In the early 2000s, when the stock market was booming, this practice was taking place. On the flip side, insurance rates may be raised to make up for stock market losses."
This is the straight answer on why your premium will likely go up from this event.
Wow, so much for trying to help you fellows out with some information.
Yes, I am saying that insurance companies have been charging much less in recent years than it takes to pay the claims. I insured a $35,000 Cessna 172 the other day for full coverage at an annual premium of $487. Now, tell me how much your $35,000 car cost you every 6 months
...and I guarantee that you don’t have $1 Million in liability on that car.
Of course insurance companies invest the capital that they have...how do you think they can afford to pay the claims, overhead, AND stay profitable? Insurance is not a charity
, it is a business just like any other and exists to make a profit. In order to make a profit, like any other business, they have overhead to cover along with the potential claims. How do you suggest they cover this cost if they don't invest or keep a reserve? This is not a unique situation to insurance and banks, many businesses do the same thing...why do you think retirement plans take a hit when the stock markets go south?
When the lower premiums are taking place nobody complains about them…they are glad the companies can make the difference through investments. Unfortunately that is not always the case. Over the last few years the premiums have been decreasing to the point of record lows. Based on your expert opinion, please tell us the straight answer as to why this trend has continued when the stock market has also hit record lows not seen since the last depression? Also, please tell us why there are only 13 aviation insurance companies in the US if this is such a money making industry and we are all just crooks.
Let’s go one step further and take investing completely out of the picture. If the average premium on single engine, light aircraft policy is $2,000 and we insure 1,000 airplanes with an average value of $100,000 for that premium, tell me how much profit we will make if we only have 10% of the group sustain a total loss during the year. Let’s not even include any loss of life or expenses outside of the aircraft itself. If my math is correct the total premiums collected would be $2,000,000 and the claims paid would be $10,000,000. Where is this windfall profit that the crooks are absconding with? Where is the money going to come from to cover the propstrikes, hangar rash, injuries, lawsuits, etc. let alone the normal costs of doing business?
Look, I am a pilot and aviation lover first and an insurance agent second. I have been flying since I could see over the panel sitting on a phone book. My degree is in professional aeronautics / aviation management and I found a way to pay for my aviation addiction while helping fellow pilots by making my living for the past 10 years in the aviation insurance world. I was an underwriter prior to switching to the agency side and I did so to allow me more interaction with the end users…the pilots and the planes. If I felt like this was a crooked business then I would walk away from it, but the fact is that a proper insurance policy is a savior when it is needed…until then it is merely an expensive stack of papers representing a contract.
Now excuse me while I don my mask and return to robbing the poor to feed the rich.
"To most people, the sky is the limit. To a pilot, the sky is home."