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Old 12-21-2005, 09:03 AM
TStoneMBD TStoneMBD is offline
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Default What is our equity in health insurance?

****I wasn't sure where to post this because it of course doesn't pertain to poker, but since alot of poker players have to deal with health insurance on their own I thought I'd post it here. If it's not appropriate here you can move it over to the Stock forum (although it's not appropriate there either) but I was thinking about posting it there originally because they might have access to the numbers from publically traded insurance companies.****

Does anyone here know the rate of investment of health insurance companies? Or, to rephrase the question, does anyone know the equity of our investment in health insurance in ourselves? If health insurance costs us $100/month, how much equity are we sacrificing to hedge against variance? Does it differ between plans (ie: catastrophic/full coverage)? Do the insurance companies create quotes specifically with a certain rate of investment in mind?

The reason why I feel this question is worth asking is that I'm considering which level of heath insurance I'd like to purchase for myself. For instance, if catastrophic insurance costs $100/month and my equity on that investment is $80 while the insurance company profits $20 it would be worth upgrading to a full coverage plan at $400/month if my equity on that investment is $380/month while the insurance company only makes $20/month there as well. I would be reducing more variance at the same rate of expense. Although I assume that the insurance companies certainly make more money as you purchase more expensive plans, I would just like to know how much exactly.

Sorry for the rambling. If you know the numbers (ballpark?) or know of a site that explains this I'd appreciate the insight. Thanks
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Old 12-21-2005, 10:13 AM
Evan Evan is offline
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Default Re: What is our equity in health insurance?

Underwriting insurance plans isn't all that profitable. Managing the float that underwriting insurance plans create can be extremely profitable (see Berkshire Hathaway). My guess is that you'll find a very small difference between the immediate profits firms make off of your insurance premiums. Also, its more likely they make less off the more expensive ones because they're willing to pay more for the extra cash. For a good description of how the insurance industry works check out page 6 of Buffett's 2004 letter to shareholders (page 7 of the pdf). Most of Berkshire's insurance float comes from General Re, a reinsurance firm that underwrites HUGE policies. My guess would be that firms can turn a bigger underwriting gross profit when they're writing smaller, personal insurance plans (however they incur a much bigger SGA cost for thos plans due to volume, overall insurance underwriting really tends to come out to a wash).

It's probably going to be pretty hard to find the information you're looking for. The publicly traded companies that provide health insurance are typically pretty huge. So they're not going to break down their businesses to the extent that you'd need to compare various plans. Also, it all depends on your actuarial estimates. Each firm is going to have its own actuaries so the answers may vary significantly across the idnustry.

Your best bet for finding any of this is loking through 10K's or other SEC filings from public firms. Start with the companies listed here. You can find all the SEC filings you need here.
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Old 12-21-2005, 10:43 AM
TStoneMBD TStoneMBD is offline
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Default Re: What is our equity in health insurance?

hi evan, great response. thanks. one thing i noticed however is that you said that insurance companies might actually make less profit with more expensive policies because they want the cash. at first glance this made sense because more cash means more interest. however, if this is what you meant to imply then i think its wrong. when an insurance company takes money from you it doesn't hold on to it, it immediately dispenses it to medical bills of other clients. In other words, if the insurance company sold you a $100/m policy with $20 profit and $80 actual insurance equity, according to the law of averages they would never have any of this $80 equity in their hands, it would be paid out to clients every month. ill take a look at your resources when i get a chance. thanks for locating them.
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Old 12-21-2005, 10:48 AM
Evan Evan is offline
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Default Re: What is our equity in health insurance?

[ QUOTE ]
when an insurance company takes money from you it doesn't hold on to it

[/ QUOTE ]
If this were true there either wouldn't be insurance companies or you'd pay A LOT more for premiums.

Here's a passage from Buffett's letter that I liked. I think this explains it well:
The source of our insurance funds is “float,” which is money that doesn’t belong to us but that we
temporarily hold. Most of our float arises because (1) premiums are paid upfront though the service we
provide – insurance protection – is delivered over a period that usually covers a year and; (2) loss events
that occur today do not always result in our immediately paying claims, because it sometimes takes many
years for losses to be reported (asbestos losses would be an example), negotiated and settled. The $20
million of float that came with our 1967 purchase has now increased – both by way of internal growth and
acquisitions – to $46.1 billion.



The more cash they have from premiums you pay the more float they have. You have to consider time value of money. Paying out $100 in 20 years is NOT the same as paying out $100 today.

EDIT: Maybe an easier way to think of this is osmething more familiar. It's pretty much the same as deferring taxes. Even though you pay the same amount of tax you pay it later and you gain. The insurers gain the most when they can defer their payments as long as possible. This is why dealing with insurance companies is a huge pain in the ass. They value holding the cash, even if it's not theirs.
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Old 12-21-2005, 11:02 AM
TStoneMBD TStoneMBD is offline
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Default Re: What is our equity in health insurance?

yah i forgot about how insurance companies take forever to pay out claims. i actually used to work in an accounting office in a hospital for a short period of time and a small part of my duties were handling insurance payments so i know first hand how ridiculous the whole process is. i also didnt consider the money they receive by people paying their premium in advance. i actually just paid 6 months in advance for my car insurance to save $90. my policy came to $1366 total before the $90 savings which which equates to about 6.6% interest, or 13% yearly interest. this would mean that the insurance company would have to make over 13% yearly interest on that money in order for my prepayment to generate a profit for them. i find it unlikely that they would make 13% on that money, but it might be close. also note something very important. if i chose not to pay my policy in full i would be making monthly payments instead. this would mean that the insurance company would have some of my money before the 6 months in monthly incrimenting amounts. because they would gain interest off of my monthly payments, it would mean that they would have to earn far more than 13% interest on my policy prepayment in order to make a profit. (sorry for the poor explanation but the reasoning is there). it seems that they are more interested in having people pay their policies up front simply to save the agony of sending out bills every month and allowing them to reduce staff.
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Old 12-21-2005, 11:18 AM
Evan Evan is offline
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Default Re: What is our equity in health insurance?

There are three parts of the insurance bussiness to think about:
1) Underwriting profit/loss
2) Amount of float (cash)
3) Retun on investments

A very basic way to understand their interaction is:
(2*3)+1 = Profit

Increasing any of these, all else remaining equal, will increase profit. Obiovusly though, increasing one will usually adversely affect another. In your example, your car insurance company sacrificied a portion of 1 to increase 2.

First of all, you were right about one part. It allows them to reduce staff and billing activities. In doing this it cuts their SGA costs. This means that they don't reduce #1 by as much as you think; althought they do reduce their top line, by x%, they improve margins and don't hit their bottom line quite as hard.

Whether or not their return is high enough to justify the price cut, I obviously can't tell you because I don't know who it is, how much float they're managing, what their actuarial assumptions are or how accurate they are.

This is a complicated business that relies VERY heavily on completely fabricated assumptions. I don't mean to imply that that's not accurate, because that's not true. My point is that it's extremely tough to analyze a single decision in a vacuum. My guess would be that if they're offering the discount it makes them more money, and not by a small margin.
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Old 12-21-2005, 11:23 AM
lehighguy lehighguy is offline
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Default Re: What is our equity in health insurance?

Administrative costs of health insurance are huge. That is where half of your premium goes.
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Old 12-21-2005, 11:33 AM
Evan Evan is offline
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Default Re: What is our equity in health insurance?

[ QUOTE ]
Administrative costs of health insurance are huge. That is where half of your premium goes.

[/ QUOTE ]
Administrative costs of not having health insurance are also huge, especially when your have a job that pays by the hour and you can do 24/7/365.
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Old 12-21-2005, 11:44 AM
lehighguy lehighguy is offline
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Default Re: What is our equity in health insurance?

He wanted an explanation of how much he is paying to reduce variance. I think the statistic I provided is a good indication.
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Old 12-21-2005, 11:52 AM
Evan Evan is offline
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Default Re: What is our equity in health insurance?

[ QUOTE ]
He wanted an explanation of how much he is paying to reduce variance. I think the statistic I provided is a good indication.

[/ QUOTE ]
I think it's an incomplete and misleading answer.
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