The Safety Net: Insurance To the Rescue?

European Straits #79

Dear all,

Everything one needs to know about insurance I learned back in 2004, when I spent 3 weeks interviewing dozens of employees and executives of a small insurance company in Chartres, France.

To sum it up, there’s the cash an insurance company brings in by billing premiums to its customers. And there’s the cash it sends out when one of those customers claims money because they’re confronted with a loss. The company profits only if the total amount of premiums is higher than the total amount of claims over a long period of time.

Therefore the fundamental law of insurance is that you can never be sure about your business’s profits and losses so long as customers can claim money from you. It’s easy to bring in more customers and cash premiums over the short term. But you can lose all that money (and more) if those customers experience losses that you’re obliged to cover over the long term. This is why every insurer has to be selective when bringing in new customers. It’s fair to say t…