Insurers always deny they’re acting in bad faith when they delay and dispute claims. They insist that they need to take so long to sort out the facts and determine if they are liable.
Trial lawyers and others have long insisted that these excuses are designed to conceal the insurance companies’ financial motives for stretching everything out.
This week, courtesy of a column by Arthur Licata in Massachusetts Lawyers Weekly, I came across a lengthy quote from Warren Buffet (a quote I don’t recall previously seeing) that perfectly explains how the insurance industry works.
Of course, the insurance business is a mainstay of Buffet’s Berkshire Hathaway and GEICO insurance and others are owned by Berkshire.
This is how Buffet explained the insurance component of Berkshire Hathaway in his 2009 letter to Berkshire shareholders:
“Insurers receive premiums up front and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect now, pay later model leaves us holding large sums — money we call ‘float’ — that will eventually go to others.
“Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims come and go, the amount of float we hold remains remarkably stable in relation to premium volume. Consequently, as our business grows, so does our float.
“If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that adds to the investment income produced by the float. This combination allows us to enjoy the use of free money — and better yet, get paid for holding it.”
What tort reformers and others don’t want you to understand is that the insurance business is really the investment business. When doctors’ medical malpractice premiums go up, doctors, ignorant of the insurance business, blame medical malpractice suits, instead of understanding that medical malpractice premiums are really controlled by investment returns, rather than payouts.
The next time sometime tells you they’re from an insurance company, think of it as a “getting paid-to hold-free money” company.
This blog is maintained by the Boston personal injury lawyers at The Law Office of Alan H. Crede, P.C.
