Insurance, a tool for risk management

Re: If you can’t take the risk, get out of the market- 10/17/2006

 

When I first read the heading I presumed the opinion was concerning the Stock Market. After reading it I realized that Ms. B was speaking to Real Estate Investment. I also realized that Ms. B doesn’t know the first thing about the functionality and concept of insurance and its purpose in society. Insurance was designed to assist individuals or companies in case of catastrophic events. The premiums paid for this guarantee were to be invested and held in reserves to pay claims if such events did occur. These premiums were calculated by actuarial therefore to protect the insurance companies from excessive claims. They did this by spreading the risk over the population of all policyholders nationally. So if a flood devastated a resident in New Jersey our premiums would help them, or if and earthquake in California devastated a resident in San Francisco our premiums would help them. One event occurred which upset the Insurance Industry in Florida. Homestead, they found that the claims for this catastrophic event were cutting into their profits and their reserves. The shareholders were going to possibly loose dividends and the value of their shares would drop especially if the company showed a loss. So to avoid such a catastrophe at company headquarters, Florida State lawmakers were lobbied to change the laws governing Insurance Companies. Our State Representatives including our Attorney General and Governor at the time turned the other way and let the insurance companies form separate corporate entities in Florida. This change in law reduced the number of policies funding reserves to cover catastrophic events in Florida. This change would limit the risk of the insurance companies and preserve their profitability.

Premiums were not artificially low for decades they were low because the risk was spread nationally. They are currently high because the lobbies transferred the cost of providing insurance to the people and the State of Florida, Citizens Insurance. You shouldn’t be condemning the hard working residents of this state you should be condemning your representatives who caved into the Insurance Companies lobbyists.  

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