The Expert Podcast

So what exactly does it mean when they say an insurance company canceled a bunch of insurance policies in a certain area? It may be because of natural disasters fires floods hurricanes earthquakes whatever the case might be. You see a lot in the news where they say such and such insurance company has cancelled thousands of policies right before a disaster. Well in reality insurance companies don't actually cancel policies. A policy while it's in effect really can't be cancelled by the insurance company except for two most important reasons: if the person with the insurance doesn't pay their premium meaning that if you pay your premium every month and you stop paying they're going to cancel your insurance, and if you committed fraud on your application they'll cancel your insurance.

But what they mean when they say canceled your insurance it means they non-renewed your insurance. There's a big difference. Insurance is a policy that has a time period of coverage. Usually you buy a one-year insurance policy and every year you renew your insurance kind of like renewing your driver's license. So at the renewal date or expiration date your insurance agent who sells you the insurance usually a month or two in advance will say hey look your homeowner's policy your car policy is up for renewal and you can review your coverages make sure you have the right type of policy you pay your premium.

Now insurance premiums technically are an annual premium so if your insurance is let's say $1,100 a year you can pay that $1,100 or some people finance it and they just pay you know $90 a month each month for a year but in reality it's an annual policy. So when you hear that an insurance company canceled insurance what they mean is they non-renewed insurance which means that the people in a certain area a certain neighborhood a certain zip code a certain state do not get to renew their insurance with that company because the company's decided you know we don't want to sell insurance in this area.

And you might think well gee that's terrible of them and you know they're shutting these people out. Well think about it if the company was making a big profit or it was viable for them to sell insurance of course they would sell it right? People want to sell stuff, companies want to sell things. The reason that they decide we're not going to sell is because they're going to lose money and the reason sometimes they lose money is because the government in that state has put a cap on how much they can charge.

If you're an insurance company and you want to sell insurance in a state for homeowners auto whatever the case might be every year you have to go to that state and tell the insurance commissioner how much you're going to charge for insurance and they have to approve your rates. That's the one thing about insurance rates they have to be approved by the insurance commission in that state in every state you do business in. In addition the terms and conditions of your policy are also reviewed by that commissioner to say yeah this is good insurance.

So if you have a policy that says I'm going to cover your house if it burns down and we're going to charge x amount of dollars per year for the house the insurance commissioner looks at it and says no that's too much money or no your policy is not good enough you can't sell that policy. So you have a choice you can either not sell the insurance or you can change it to match what the insurance commissioner wants. And you might say why don't they just lower the price? Well that creates another problem.

If you lower the price of insurance where you're not collecting enough money to be able to pay out claims first of all it's going to create a problem for your company but even if you were an insurance company that decided you know what we're going to be nice to people we're going to lose money on insurance because we care about home owners we care about property owners and we're not going to charge them that much even though we're going to pay out more well the insurance commissioner will step in again and say this is not good because as an insurance company you have to show to the insurance commission that you are collecting enough money and you have enough money in the bank to be able to pay out claims when they come in.

So if you decided just because you're a you know an altruistic or caring company that you're not going to charge as much money for policies as it takes to pay out claims the insurance company will shut you down the insurance commissioner will shut you down the insurance licensing board will shut you down. So you have to submit to that licensing board your premiums you're going to collect from let's say that whole neighborhood. Let's say everybody in the neighborhood pays $1,000 a month and that's unreasonable number but we'll use it as a round number and you have a 100 policies in that neighborhood so you're collecting $100,000 a month that's about $1.2 million a year. But if your claims history shows you're paying out $2 million a year on claims in that neighborhood you're not going to have enough money to pay claims. The insurance commissioner is going to say you won't be able to last in business so we're going to shut you down.

Or even if you pay out only 1.2 million in claims the insurance commissioner is going to say well where's your money for your payroll for your rent for all of your expenses your insurance and they're going to make sure that you have enough income to cover the expense of paying out claims. And the insurance company has to walk a fine line they can't charge too much because then people won't buy insurance and the insurance commissioner won't accept it but if you charge too little you won't be able to pay out claims even if you wanted to because you'll have no money in the bank and the insurance commissioner will look at your balance sheet and your profit and loss statement and say this is not a the math doesn't work this insurance business strategy this business plan is not going to be sustainable.

So even though it might seem like insurance companies charge too much they gauge and they calculate their premiums based on what they estimate the payouts are going to be and that's sometimes based on the past but also based on what they think is going to change in the future. Certainly they're going to make a profit that's the reason that they do this because all their employees have to get paid they have stockholders. The question is how much is too much profit? Insurance companies are usually on par with other types of companies.

The other thing is if they weren't making an average amount of profit that companies do they would also get out of the business because the capital and the cash involved to go into a business to fund everything to finance everything to buy buildings to pay for payroll if you weren't making a good return on that you would just put it in the bank put it in a CD at 6% or invest in real estate at 8%. So unless you're making a higher return what's the reason for putting it into an insurance company when you could get wiped out in a year if there's a big fire or an earthquake or a flood or hurricane?

So insurance companies have risk and the investors and the owners of the insurance company have to calculate is it worth putting my money into this company when I can't charge enough money to pay out claims? You will be back in your video in just a few seconds in the meantime remember that actual human.com offers you live one-on-one private video consultation with an expert in this exact subject we want to listen to your story we want to hear your questions we want to give you expert advisement of your options and tell you what we know about your particular situation now back to your video. I can't charge enough money to be profitable and again it's a fine line.

The question comes is when the insurance companies take advantage of that and when they are not being responsive to claims. For most PNC Property and Casualty Insurance which is auto home owners physical damage those kind of things the rates and the coverages are very very well managed and regulated by the insurance commission in that state so they usually don't get too far out of whack. If anything sometimes they charge too little. It's easier for a company to undercharge for insurance than it is to overcharge because they could say well we won't pay out that many claims we don't need to charge that much money.

And sometimes a new insurance company trying to break into a market will undercharge for premiums to try to get market share steal customers from other companies. That's why you see Geico 15 minutes to save you 15% on car insurance right? You don't see that as much anymore because when they first did that marketing campaign they were trying to be a new player to gain market share. Now that they have the market share they've ramped up their rates more in line with the rest of the companies.

Other types of insurance not so much health insurance there's not as much regulation and it's easier to over inflate but Property and Casualty even though it's an easy punching bag to kick when they're down when there's a big event fire hurricane flood earthquake again those Executives and those actuarials try to calculate very very carefully how much they can charge and not try to charge too much because if they charge too much they'll lose business to another company. Remember there's competition with insurance.

So if you see a big company pulling out of a market or non-renewing policies it's not because they're trying to be a jerk. It's because they looked at that market and said I probably can't pay out claims if I only charge this much in the long run and if I charge a lower amount or the amount that the insurance commissioner doesn't let me go above you know I might be out of business if I have a big event you know an earthquake or fire.

So again insurance companies you know they're not charities they're not doing this for free they are making money but in many cases the profit that they make is in line with every other company you do business with. You buy a pair of Nike shoes they probably make more profit on the Nike shoes than on your insurance policy and certainly it's more sensitive because the insurance company is there to look out for you when they have to pay a claim you're depending upon them to fix your house or buy you a new house or to repair your car so it's a little bit more sensitive and a little bit more emotional when that happens.

And again I'm not saying the insurance companies are making money they're executives are multi-millionaires that's not the issue. It's that first of all the word cancellation really isn't accurate because they really don't cancel policies they non-renew it which for many consumers seems like a cancellation. You know you have your policy every year you pay your premium and all of a sudden they tell you we're not going to renew your policy. Nowhere does the word cancellation appear in those notices it always says non-renew.

Cancellation would happen is if in the middle of your one-year policy they say we're cancelling we're pulling your policy they can't do that it's a contract they can only do it if you don't pay the bill or if you committed fraud on your application you lied to them some way. Now most people don't realize their policies annual because they just pay in a monthly premium they basically finance their insurance so they don't really know that there's a renewal every year. They just think oh I just got this notice I can't have insurance anymore that must mean it got canceled. That's not what happened.

What happened was at the end of that policy term that one-year term the insurance company said you know we've looked at this and this rate we're charging you and the risk we have and the amount we have to pay it's not it doesn't make sense we're not going to be able to pay out the claims the insurance commissioner will look at our bank account and say you don't have enough money to pay claims because you haven't collected enough from the consumers so we're not going to be able to do this.

And if you notice the places where this is happening are in places where they're not allowed to increase rates good example is Florida and California right? They both have big insurance problems. In California people can't get coverage. In Florida the rates are too high. In Florida you can get insurance coverage if you're in a hurricane zone a flood zone you can get insurance cover it's going to probably cost you a lot of money there's some people paying 10 15 20,000 a year for insurance but at least you can buy it. In California the companies are pulling out why? Because California has put a cap you can't charge more than this much money and so the insurance company says well if I can't charge what it takes to pay the bills then I have to stop.

I have to it's almost like saying if you were a lemonade stand right? If you had a lemonade stand on the corner of your house and for every cup of lemonade you spent 8 cents on sugar lemons the cup the water and the ice eight cents that was your cost and you sold your lemonade for 20 cents a cup and all of a sudden the government came in and says you can only charge 5 cents for a cup of lemonade max you can't charge more than 5 cents. Okay well maybe you could for a while because if you wanted to be nice to the community and kick in the other three cents yourself you could do that but at some point you'd run out of money and you wouldn't be able to continue. And if the government also said we're only letting you charge 5 cents we're also going to look at your bank account to make sure that it's growing you'd have to shut down the same day.

So again it's an oversimplification I'm not trying to be an apologist for the insurance companies because certainly they all have their faults they all do things wrong but we do need to have insurance we do need to have a viable sustainable financially sound insurance market. We need to have companies that are willing to sell insurance because the more companies that pull out the ones that are left they're taking more risk. It's not divided up over 10 companies it's only divided up over three. So now if you have a catastrophic event one hurricane one earthquake one fire could wipe out the remaining three companies. If it was divided up over 10 yeah they might struggle but at least they could pay out the claims and stay in business.

I'm certain that everybody has very strong opinions about this insurance reality I'd love to hear in the comments below what you think. Again don't shoot the messenger we're just trying to describe first of all the reality that insurance being cancelled is not really what's happening because they're not just yanking the rug off from under you in the middle of your policy. Usually you have two or three months notice before your policy's due to find another one if they're not going to renew it.

And at the same time the insurance rates yeah they're high and they've gone up but they're also calculated by the insurance company figuring what is the minimum we can charge and still be able to pay claims and the minimum is because companies want market share they want to sell as many policies as they can they want to grow their business so by having lower prices they'll grow their business especially when there's competition. If they jack up the rates too much and there's other people that are willing to sell it for a dollar less they'll lose market share. So in most cases the economy works. In some cases it gets a little bit crazy but at least there is a huge amount of regulation at the state level for what they can charge by your insurance commissioner and the board that looks at rates and coverages.

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