What is our equity in health insurance?

[TStoneMBD]

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.

[Evan]

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.