Truth behind insurance fees and carrier profits

Why do so many consumers assume insurance companies are making huge profits with little oversight? It’s a question I’ve been thinking about a lot lately — and the data tells a different story. In most personal lines (like auto and homeowners insurance), insurers are losing money. Many carriers have had combined ratios over 100% in recent years. That means their losses and expenses exceed the premiums they collect. On top of that, insurance is one of the most regulated industries in the U.S. Each state has its own Department of Insurance with teams dedicated to reviewing rate filings, ensuring compliance, and requiring justification for any changes — all backed by data. When it comes to personal lines, this is actually one of the most heavily scrutinized and low-margin areas in the entire industry. So why does the public perception still paint insurers as greedy or overly profitable? As Krzysztof Ostaszewski points out: "You want insurance companies to be profitable — the alternative is far worse."

How Insurance Companies Really Make Money And Why It Matters to You Insurance companies don’t just collect premiums,they carefully balance risk, payouts, and investments to stay sustainable while protecting millions of people. Here’s a simple breakdown of how it all works 1. Risk Pooling: The Power of the Group At the core of insurance is risk pooling: ➡️Everyone pays a premium into a shared fund ➡️Only a small percentage will experience a loss at the same time ➡️Premiums from the many cover the losses of the few Why this works: Losses are unpredictable for individuals, but very predictable when insurers analyze large groups. Example: 100 car owners pay ₵1,000 each → ₵100,000 pool • Only 5 drivers have accidents costing ₵20,000 total • The pool covers the claims • The remaining funds support operations and future risks 2. Premiums: Your Contribution to the Safety Net Your premium isn’t “money lost”, it’s your contribution to a financial shield that protects the entire community. Premiums fund: • Claims • Administrative costs • Reserves for future risks Insurance is essentially a shared safety system that benefits everyone. 3. Profitability: How Insurers Stay Sustainable To remain reliable, insurers must stay profitable. They achieve this through: ➡️Accurate pricing – Using data and actuarial science to assess risk ➡️Efficient claims management – Ensuring valid claims are processed properly ➡️Investing premiums – In assets like government bonds, real estate, or financial markets Example: ₵100,000 collected → • ₵20,000 paid in claims • ₵10,000 for operations • ₵70,000 reserved or invested for future claims This balance ensures long-term stability. 4. Why This Matters to You Understanding this helps you see that: ➡️Insurance isn’t a scam — the system works because risks are shared ➡️Premiums are used to protect the entire community ➡️A profitable insurer = a reliable insurer (especially in major disasters) 🔑 Key Takeaway Insurance = Risk management + Community contribution + Financial sustainability Your premiums help build a system that protects you today and ensures stability for tomorrow. Question: Did you know your premium contributes to a community safety net? Share a moment when insurance protected you or someone you know!

Insurance claims are reducing but premiums are rising? 🧐 Recently I renewed by home and car insurance, both had increased significantly even though there had been no claims on either policy. Brian Hanley, of the Alliance for Insurance Reform, has criticised the rising profits of insurance companies despite a significant decrease in claims, as highlighted in a recent report from the Injuries Resolution Board. According to the report, the volume and total value of personal injury claims have dropped substantially since the introduction of judicial guidelines on awards in 2021. Figures reveal a 40% decline in claim volumes between 2019, the year before the pandemic, and 2023. Speaking on RTÉ Radio’s Morning Ireland, Mr. Hanley highlighted the burden of soaring insurance costs on businesses, sports organisations, and voluntary groups, calling the profit increases unjustifiable given the fall in claims. He urged the incoming government to address the issue. “We need them to act on our behalf,” Mr. Hanley stated. “There have been no meaningful or sustained reductions, certainly nothing reflective of the savings being made or the decrease in claim volumes. The last Central Bank report showed that while claims were dropping, premiums rose by an average of 8%, and insurer profit margins soared by 55% in the same year.”

What Are The Honest Reasons Insurance Premiums Have Risen So Dramatically? The upcoming Florida House of Representatives investigative hearings this Friday at 8 am EST aim to shed some light on this critical issue, particularly surrounding the role of MGAs (Managing General Agents) and affiliated companies. Florida's insurance regulators hid a report suggesting that insurers hid profits through these entities and current commissioner Mike Yaworsky wants more power to investigate them A McKinsey & Company report, "Insurance MGAs: Opportunities and Considerations for Investors," highlights how these entities can significantly influence insurance markets. MGAs are increasingly attractive to investors, often affiliated with or owned by insurers, and capable of generating substantial profits—often outside the transparency of typical regulatory oversight. The report outlines how affiliated MGAs and third-party administrators (TPAs) can indirectly deliver substantial returns to investors or executives, bypassing the stringent dividend-approval processes regulators typically require to protect policyholders. Given this dynamic, vigorous regulatory oversight and transparency become more crucial than ever. The hidden report, public documents disappearing from Florida's regulatory website, and conflicts between public statements and disclosed facts raise serious concerns about transparency and accountability within the insurance marketplace. Regulators, legislators and journalists—perhaps including Lawrence Mower, who recently brought critical hidden reports to public attention—to closely scrutinize these affiliated relationships and disclosures. For anyone involved with insurance in Florida, this hearing, and the issues raised by the McKinsey report, are critical to understanding what’s driving premium increases and how policyholder interests might be compromised. This is not isolated to Florida. Amy Bach of United Policyholders (UP) told me of similar affiliated growth in California. Transparency and honesty matter. For more insights, see McKinsey's attached analysis on MGAs

The hidden cost of insurance that almost no one talks about: reinsurance. I’ll be honest — until my friend Nigel Wright brought it up, I didn’t fully appreciate how much reinsurance impacts insurance premiums. Nigel knows the insurance industry inside and out, and once I started digging in, it became clear: Reinsurance costs are a hidden — but massive — factor in both insurer profitability and the premiums we all pay. Just this week, The Wall Street Journal highlighted Root Insurance’s financial turnaround, and a key reason for their success? A sharp reduction in reinsurance costs. So, what drives those reinsurance costs? It’s not your average bodily injury claim from single event occurrences like car wrecks. It’s large-scale disasters — think hurricanes, floods, wildfires — the kinds of catastrophic events that strain the entire insurance system. Yet every time insurance rates go up, it’s all too easy to point the finger at plaintiffs’ lawyers and personal injury claims. That’s a tired and lazy narrative. The truth is that insurance pricing is complex, and factors like: ✅ Reinsurance costs ✅ Rising property damage repair costs (driven by labor shortages and inflation) ✅ Natural disasters …all play a major role — but those factors rarely get mentioned when tort reform advocates go on the attack. So next time someone blames trial lawyers for rising premiums, ask them how much they know about reinsurance pricing. Chances are, you’ll get a blank stare.