If there is a more hallowed temple in all of American capitalism than a successful insurance company, it would be hard to imagine it. And if there is a more complex and counterintuitive part of financial management, no one has discovered it. Few in the nonprofit sector go there voluntarily. Read on, and we'll make it digestible.
All insurance, whether it is health insurance, dental insurance, life insurance, or property insurance, is essentially the activity of providing temporary access to capital for a fee. In the ordinary course of events, both individuals and companies can experience sudden and potentially ruinous financial demands from health crises, natural disasters, accidents, and numerous other perils. Without insurance, these calamities could be financially devastating. With proper insurance, they can be more easily tolerated. Of course, the way that the system works is complicated enough to make a grown actuary cry.
At the outset, an insurance company collects money for nothing because it collects premium dollars ahead of time before it ever pays out a single claim. This is free money, for a while. The lag between when the cash premiums are collected and when the first claims get paid out can be a month, a few months, or even a few years, depending on the type of coverage purchased. Meantime, the money sits there. What's an insurance company CEO to do?
If you said “invest it” you too could ...