The insurance industry is a huge business in the U.S. with a long history. When I talk to friends about it, I get the general impression that while most people here have a rough understanding of what insurance is about, not many understand how the industry really works. Did you know, for example, that insurance companies are primarily in the business of making money on the money they keep? It is not uncommon to make a loss on the underwriting aspect of the business! In this article, I’ll delve into the history of the industry, highlight some common misconceptions, and discuss its future in the age of Big Data.
The insurance business originated primarily to protect people from being impoverished by an unforeseen event. For a long time, insurance companies were considered part of the financial services industry, and operated under the same regulations as banks and investment companies. In 2000, however, a law was passed that allowed insurance companies to operate under their own, separate set of rules. The idea was to allow them to innovate and compete more freely.
For the most part, insurance companies are regulated at the state level, so there is a lot of variance in the amount of freedom companies have to set their own rules. In particular, insurance companies are required to follow the "prudent person" standard, which means that they face the same considerations as a person would when making a financial decision, including diversification, appropriate asset allocation, and so on. This is a big part of what makes investing in the insurance industry so different from other forms of investing.
Despite the fact that insurance companies exist to protect us from the unexpected, it is a business, and businesses exist to make money. In the insurance industry, that means selling policies and collecting premiums. We’ve all heard the stories of insurance companies that don’t pay out; however, those are exceptions to the rule. Insurance companies are legally obligated to pay their policyholders, and they invest their premiums in order to cover these claims.
This doesn’t mean that insurance companies are charities, however. The amount that companies pay out is based on the risk of a policyholder submitting a claim. The higher the risk, the more expensive the policy. Younger people, for example, are more likely to file a claim than older people, so they will have to pay a higher premium for the same policy. In general, insurance companies don’t want to sell policies to high-risk individuals, so they set the premiums accordingly.
The business model of insurance companies is the result of a long evolution from the first insurance companies that were formed in the 1700s. In some ways, it’s a little shocking that the industry has survived. The first companies were formed when the average life span was much shorter than it is today. Many people died before they could collect on the policies that they bought. It was also more common to see families supported by a single breadwinner, so it was more acceptable for men to take risks with their lives.
In the late 1800s, something happened that completely changed the business of insurance. The industrial revolution had a huge impact on the way we live our lives. People were moving to cities and the middle class was growing. The effects of this change were also felt in the insurance industry. In particular, people started to take more of an interest in their health and mortality rates started to fall. Insurance companies were faced with a major problem: the policies that they were writing were no longer profitable!
This is where actuaries came in. The job of an actuary is to study the statistics and make predictions about the future. If a person bought a policy that would pay out a certain amount of money in the event that the policyholder died, an actuary could estimate how likely that is to happen. This allowed insurance companies to set premiums based on risk rather than on the assumption that everyone was more likely to die in the past. The result of this change was that people started paying premiums that reflected the real risk that they posed to the insurance company, which made it possible for the insurance business model to survive.
In the early days, insurance products were mostly limited to things like life and property insurance. As time went on, companies started to offer more exotic products, such as health and auto insurance. Now, one can buy insurance for all kinds of things. Travelers insurance, for example, is one of the best ways to ensure your vacation is protected should the worst happen. In the current global climate, most people would consider it reckless to make travel plans without buying such an insurance policy.
The Advent of Big Data
For a long time, insurance companies could only make predictions about the future based on what they knew about the past, which was a limited amount of information. It wasn’t until recently that we started to be able to collect more information about people. We have more data on them, and we collect it faster than ever before. This data is known as Big Data, and it is changing the way that insurance companies do business.
Big Data is a term that refers to the massive amounts of information that we are capable of collecting and processing today. The advent of the internet means that there is information on virtually every aspect of our lives available at our fingertips. The amount of data that we can collect is truly staggering. It’s not just that we have more of it, but we also have computers that are more capable of analyzing it. The two technologies together have made it possible to make predictions about people and their behavior in a way that was never possible before.
The internet has also made it easier for people to buy insurance on a one-off basis. Rather than having to go to a broker or agent, people can purchase individual policies online. This is great for the customer, because he or she can get a quote and buy the policy without having to pay a fee to an agent. This also makes it easier for insurance companies to reach new customers and sell them policies.
The other great thing about Big Data is that it allows insurance companies to understand their customers better. How many of us have bought a policy, only to have it lapse because we forgot to pay the premium? This is a huge problem for insurance companies. If a customer doesn’t pay the premium, then they are no longer a customer. When you consider that most insurance policies are for a year at a time, it can be very costly to lose a customer.
Companies are trying to address this issue by making the payment process easier. Some insurance companies, for example, will let you pay your premium automatically over the internet. This is a great convenience, but it doesn’t solve the problem of people forgetting to pay or not being able to pay.
What Does the Future Hold?
In the past, it wasn’t uncommon for a company to use a single data point to make a prediction about someone. This could be something as simple as using the fact that someone smokes to predict that they will get cancer. Now, however, we have access to so much more information. Insurance companies have access to information about the way people shop, the places they go, the hobbies they enjoy, and much more. The advent of the Internet of Things (IoT) means that companies are able to collect information from devices that are attached to the house and office. For example, insurance companies can know exactly what time you go to bed, or how much you drink.
With all of this data, insurance companies can start to make predictions about the future in a much more sophisticated way. We’re not just talking about using a single piece of data anymore. Instead, they are looking for clusters of data that might indicate something about someone’s lifestyle. For example, if they know you have a habit of going to bars every weekend, they can predict that you’re at a high risk of having a car accident due to drunk driving.
We’re also seeing a lot of companies working with third-party data. This would be anything from weather data to social media data that companies buy and use to predict the future. For example, if there’s a storm coming up, it makes sense for companies to increase their premiums to account for the possibility of more claims.
It’s important to remember that, even though we’re now able to make more sophisticated predictions about the future, we still have to deal with the fact that we can’t predict everything. There will still be unfortunate events that come out of nowhere, and insurance companies will have to figure out ways to protect themselves from those events.
In some ways, the insurance industry is one of the oldest and most stable in America. In others, it’s one of the most rapidly changing. It will be interesting to see how the industrying integrates big data, and how this is regulated going forward.