Insurance and Personal Injury

In the next few posts we discuss how personal injury law and insurance companies relate. We begin by discussing insurance companies.

How an Insurance Companies Makes Money

An insurance company makes money two ways. First they collect insurance premiums from their insurance customers in exchange for insuring their customers from agreed upon risks-the risks set forth in the insurance policy. Insurance companies price their premiums based on their actuarial  projection of the likelihood of having to pay  for an insured event. In an ideal insurance world the amount of total premiums exceeds the total amount of pay out on insured events and  claims overhead. This means the insurance company makes money from the sale of insurance.

The second way an insurance company makes money is from the investment of insurance premiums that are held in reserve until claims must be paid. This is often called “the float.” Since premiums are collected and claims have yet to occur an insurance company is allowed to invest a portion of its premiums. This is done in the stock market and also in the sale of insurance products like annuities.  If the insurance company is making money from collecting more then it pays that profit is also invested.

Personal Injury Claims

Understanding how insurance companies make money is important to understanding how insurance companies handle personal injury claims. In economic good times when the stock market is doing well insurance companies do well on their investment of premiums. In fact they make most of their money in economic good times. In economic good times they tend to charge less for insurance premiums because they can use the increase in collected premiums to make money at a greater rate then they ever make from the difference between collected premiums and pay outs.

Economic hard times change insurance company dynamics. Since insurance companies are not making much on their investments they must concentrate on the sale of insurance side of the profit equation. This means they tend to charge more for insurance, and they become more difficult as far as paying claims. In tough economic times they deny claims at a higher rate, they offer less to settle claims, and they delay in paying claims.

All of these realities translate to the need for a personal injury lawyer when dealing with an insurance company-particularly in economic hard times. 

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