Has anyone given this subject serious thought?
Conceptually, each month you save some or all of your current insurance premium to cash and every six months or so you buy PRPFX (with 10% EDV of course). You could do this with some or all of your insurance policies and extended warranties. Years down the road you have saved thousands of dollars in premiums plus earnings (unless you have to use your insurance fund).
pros and cons of self insurance?
Moderator: Global Moderator
Re: pros and cons of self insurance?
I agree that it only makes sense to insure against events that you can not cover with your own excess savings. I suppose you have to already have the savings before you stop the insurance though. It is like all the other financial products that charge for providing money up front rather than over time. The big problem with insurance IMO is when they delay paying out. If you have to pay for things yourself in the interim in the hope that they will pay out eventually, then what is the point of the insurance?
Apparently insurance companies often actually pay out more than they take in as premiums. The investment returns they make using the float covers the difference:
http://en.wikipedia.org/wiki/Insurance
"Insurance companies earn investment profits on "float". Float, or available reserve, is the amount of money on hand at any given moment that an insurer has collected in insurance premiums but has not paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest or other income on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[10]
In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held"
I heard somewhere that the very high personal savings rates in China are because people their basically are insuring themselves as you describe.
Apparently insurance companies often actually pay out more than they take in as premiums. The investment returns they make using the float covers the difference:
http://en.wikipedia.org/wiki/Insurance
"Insurance companies earn investment profits on "float". Float, or available reserve, is the amount of money on hand at any given moment that an insurer has collected in insurance premiums but has not paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest or other income on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.[10]
In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held"
I heard somewhere that the very high personal savings rates in China are because people their basically are insuring themselves as you describe.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: pros and cons of self insurance?
One way of doing this sort of halfway is to simply raise the premiums on the coverage you currently have so that you are effectively self-insuring in most cases, but still have coverage in the event of a catastrophe.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: pros and cons of self insurance?
Yeah. I have pretty high deductibles on my home and auto insurance. Also I never pay for warranties which is a form of self-insurance on little things like cell phones and appliances. The PPs large cash allocation dovetails with self-insurance.MediumTex wrote: One way of doing this sort of halfway is to simply raise the premiums on the coverage you currently have so that you are effectively self-insuring in most cases, but still have coverage in the event of a catastrophe.
Re: pros and cons of self insurance?
What I am wondering is could you put together a rational for deciding when to self insure? For example, if you save $50 a month to increase your deductible from $1,000 a year to $5,000 a year then if you don't have more than $1,000 in medical expenses for almost 7 years you will have saved the $4,000 difference in deductibles. So is this a good idea or a bad idea? Does it only make sense if the monthly savings is $100 or more? It seems like there should be some rule of thumb, but I have not found one yet.
Re: pros and cons of self insurance?
If you want to go crazy you can use the actuarial methods that insurance companies themselves use.
I make this decision in the opposite direction: I have a ballpark dollar figure cutoff in mind, for the amount of cash I could float without drama. It's in the ballpark of one month's wages. I only insure for losses above that cutoff. If insurance markets are reasonably efficient then you can set a risk level you're comfortable with and be assured of a reasonably fair premium. You can ensure you're getting market rates by cross-shopping your policy every few years.
I make this decision in the opposite direction: I have a ballpark dollar figure cutoff in mind, for the amount of cash I could float without drama. It's in the ballpark of one month's wages. I only insure for losses above that cutoff. If insurance markets are reasonably efficient then you can set a risk level you're comfortable with and be assured of a reasonably fair premium. You can ensure you're getting market rates by cross-shopping your policy every few years.
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MachineGhost
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Re: pros and cons of self insurance?
About 1/3rd of those lacking health insurance in the U.S. are upper-middle class that choose to self-insure, so it is certainly possible.
I think the self-insure issue is complicated by the fact that health insurance is the U.S. is not real insurance (was it ever?), it's actually a group co-op plan for medical expenses. And also that basic major medical liability coverage is no longer available by law, or won't be under the Affordable Health Care Act. The best one can do nowadays is use a tax-deferred Health Savings Account in combination with a high deductible comprehensive medical plan. But it's hardly optimal as there is not much savings to invest after paying the overpriced premiums.
Assuming the Affordable Health Care Act isn't found unconstitutional, the U.S. will well be on its way to a truly portable, employer-agnostic insurance market as employers drop group co-op coverage (its cheaper to do so) and force people to shop in the state exchanges for government-mandated health insurance policies.
No industry is more overregulated and the opposite of a free market than U.S. health care, but I digress. Compared to Switzerland which does have a free market in health insurance, comprehensive premiums in the U.S. don't seem all that bad for those under 30.
Another thing to consider is that it is totally up to the investment acumen of the assigned investment managers to have client insurance companies be viable in the long-term. Given the poor track record of Wall Street, that is hardly encouraging.
MG
I think the self-insure issue is complicated by the fact that health insurance is the U.S. is not real insurance (was it ever?), it's actually a group co-op plan for medical expenses. And also that basic major medical liability coverage is no longer available by law, or won't be under the Affordable Health Care Act. The best one can do nowadays is use a tax-deferred Health Savings Account in combination with a high deductible comprehensive medical plan. But it's hardly optimal as there is not much savings to invest after paying the overpriced premiums.
Assuming the Affordable Health Care Act isn't found unconstitutional, the U.S. will well be on its way to a truly portable, employer-agnostic insurance market as employers drop group co-op coverage (its cheaper to do so) and force people to shop in the state exchanges for government-mandated health insurance policies.
No industry is more overregulated and the opposite of a free market than U.S. health care, but I digress. Compared to Switzerland which does have a free market in health insurance, comprehensive premiums in the U.S. don't seem all that bad for those under 30.
Another thing to consider is that it is totally up to the investment acumen of the assigned investment managers to have client insurance companies be viable in the long-term. Given the poor track record of Wall Street, that is hardly encouraging.
MG
kobe1 wrote: Has anyone given this subject serious thought?
Conceptually, each month you save some or all of your current insurance premium to cash and every six months or so you buy PRPFX (with 10% EDV of course). You could do this with some or all of your insurance policies and extended warranties. Years down the road you have saved thousands of dollars in premiums plus earnings (unless you have to use your insurance fund).
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!