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Thread: Insurance Collective.

  1. #1
    Dr.Awkward Robcore's Avatar
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    Insurance Collective.

    Hi folks. I'm far from an expert on what I'm about to ask...hence my inquiry here.

    So, I have a house, and I pay say, $500 a year to have it insured, as per the requirements of my mortgage.

    I hate paying for insurance.

    If I could get, say, 2000 home owners to pay $500 into an insurance fund for our homes, collectively, we'd have a million dollars of insurance against the loss of one of our homes. Given that the cost of building a house around here at contractor prices is probably $2-300,000, that million dollars would collectively protect the 2000 members of the collective against the likelihood of 1 in 500 homes being destroyed...and I think the odds there are pretty damn good for the members.

    Now, once that initial $500 each was paid, the million dollars could be invested on behalf of the members, and no further premiums would have to be paid in order to remain insured as long as no claims were made. In the case that there were a claim, the expense that the fund would incur could be covered by an incidental top-up-premium(cheaper than the initial $500), or possibly even by the profit made by investing the million dollars.

    Now, over time, provided that there were no claims being made, the invested fund would grow and grow and grow, with the potential to have dividends paid out to the 2000 investors that they could use to pay off their mortgages (or for whatever else they wanted, I suppose).


    Is there a reason why people don't do this? It seems way better for insurance to be maintained by a collective interest on the part of the insured members than for it to be purchased from for-profit companies.

    Thoughts?

  2. #2
    Senior Member Senseye's Avatar
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    It seems reasonable, some obvious hurdles would be:

    1) Holding the money in trust so there is no risk of someone making off with it. Probably some legal overhead costs there.
    2) Issues with con artist types attempting to join your collective and then committing insurance fraud (i.e. burning down some low rent house and claiming a million for it). Can the collective afford to assess value/investigate claims? You may have to hire some people to do this (more overhead).
    3) I think the odds of a serious house fire (total loss) are low (1 in 1250 according to one source) but there will be a variety of other smaller claims.

    I think your theory is sound, a group could do it cheaper than for profit companies, but it would take some management. It's really the trust issue. I think if you had 2000 generally honest neighbors you could pull it off. But a few bad apples would ruin everything.

  3. #3
    Now we know... Asteroids Champion ACow's Avatar
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    The idea itself is fine. In practice though, you've got:

    a) who trusts who to administer that money/scheme (how much will they be paid? How will records be kept?)
    b) what's insured (flooding, fire, winds, car hits your house?)
    c) incentives/disincentives (non-claimable minimum)
    d) I'm guessing that you're talking about grouping a bunch of people together in one area, which significantly increases your odds of a bigger negative tail-end event probability wise (i.e. the odds of one house being destroyed is small, but if one house goes, the odds of more than one house going in any event is quite likely)
    e) How will you deal with fraud?
    f) How will you deal with legal cases brought against you?
    g) How will you calculate people's actual premiums? (not everyone has the same house to replace, not everyone is a responsible home owner)

  4. #4
    Now we know... Asteroids Champion ACow's Avatar
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    Also, do you realize what 2000 homes look like? I think you're severely underestimating the general rate of destruction for such a large area...

  5. #5
    Utisz's Avatar
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    It seems you're just cutting out the middle man: you'll save the profits that the insurance company make. In theory, healthy competition between insurers should keep their cut reasonable and there would not be the incentive to do the kind of thing you're talking about.

    The main problem with your scheme is that you need a lot of premiums so that the law of large numbers kicks in. If you have 2000 home owners and can fully cover 3 houses on your assets, what happens if four houses beside each other burn down or if there's a tornado or somesuch? You need to spread your risks over as big an area as possible to offer security.

  6. #6
    Meae Musae Servus Hephaestus's Avatar
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    Two thousand people is a lot of people. I think a quick perusal and contemplation of the implications of Dunbar's number would really pull how big a number of people that is into perspective.

    I also don't think your holding number is big enough. If these are all neighbors, or mostly clustered in neighborhoods, it's well within reason that more than 5 houses in the collective could be destroyed in short order by your average garden variety natural disaster.

    Lastly: I just dislike homeowner's associations, which is more or less what you're talking about creating. They can't even manage to not be petty and intrusive when they have less than 50 households, I can't imagine how unwieldy and fractious a collective of 2000 households would be.
    I'm suspicious of people who say they'll die for a flag but won't wear a mask for their neighbor.

  7. #7
    Global Moderator Polemarch's Avatar
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    Spoiler: Obligatory Appeal To Authority
    I work for an insurance company, and hold a designation in underwriting.


    @Robcore, what you're describing is just a mutual insurance company, or a small captive.

    Here are the obstacles though:

    1. 2000 homes is not nearly wide enough of an exposure. Particularly if they are all in the same geographic area. The way insurers pool risks is to select a very large, diverse range of exposures to underwrite, then they carefully manage that portfolio to make sure they aren't overexposed to a specific catastrophe risk, or other systemic risk. The variance on your 2000 home portfolio would be volatile - for a few years you might turn a profit (i.e. a distribution back to your subscribers, or a rebate etc.), but then you'll get one bad year when your reserves will be wiped out and whoever's administrating that portfolio will be liable for a failure to uphold the contract. Which brings me to my second point:
    2. The reason insurance is so heavily regulated is precisely to avoid insurer failure. Not only would such a cooperative need to develop the administration, technical knowledge, and actuarial skills to manage that portfolio (which existing insurers already have), but developing all of that would swallow up any savings you think your approach would be gaining.

    In summary, insurance companies exist precisely to solve the problem you're suggesting exists with insurance companies. They aren't the rampant profit machines you think they are - insurers are constantly competing for market share, and most of the profit that exists comes from investing their "surplus" (which is a fancy word for the reserves they have over and above what regulators require them to hold to pay anticipated claims), not from underwriting profit. For several decades, insurers have survived with intermittent periods of combined ratios over 100 (in other words, losing money on insurance operations), but still turned a profit to their shareholders by making good investments.
    We didn't land on Plymouth Rock. Plymouth Rock landed on us.

  8. #8
    <3 gator's Avatar
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    I think that if you're really serious about this idea that Co-operatives and Mutuals Canada might be able to provide you with specific advice around law, organisation, etc.

  9. #9
    Senior Member Starjots's Avatar
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    If you pay off the mortgage you can self insure and your cooperative shrinks to one.

  10. #10
    Dr.Awkward Robcore's Avatar
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    Thanks for all the feedback folks. Will look into the resources that have been shared, and reflect on the insights provided.

    My sis works in insurance, and I find the whole industry to be disgusting. In Canada at least, people are way over - insured.

    Seriously have to face - palm when I meet people who buy earthquake insurance.

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