This disturbing because I just started working at a State Farm agency. I was told State Farm only makes money off the interest that funds in the bucket that customers pay into. So there should be plenty of money to pay claims. Boss told me thinks it something like 200 billion dollars.
It’s just a larger risk pool made up of other insurance companies. When you have a home insurance policy, you’re entering into a risk pool with everyone else in your policy that’s essentially a hedge against some catastrophic loss, everyone in the pool pays for each loss and it spreads the burden out, rather than a single member losing their home or going bankrupt.
For the home insurance example, when you have insurance companies that cover risk pools in one geographical area, especially smaller agencies that are regional, they have to hedge against the risk of a catastrophic loss so large the risk pool can’t cover it (like California wildfires) So they enter into an even large risk pool with other insurance companies.
This chain can actually go on for a while with several layers of reinsurance.
So while you do hire a company to manage the risk pool, really the risk is divided amongst the members/policy holders in the pool.
This disturbing because I just started working at a State Farm agency. I was told State Farm only makes money off the interest that funds in the bucket that customers pay into. So there should be plenty of money to pay claims. Boss told me thinks it something like 200 billion dollars.
Don’t insurance companies carry something like “super insurance” where it’s like a meta policy in the event of something catastrophic?
Yes, it’s called reinsurance.
Yes, but thats the insurance company hiring other insurance company to cover sone of the risk.
It’s just a larger risk pool made up of other insurance companies. When you have a home insurance policy, you’re entering into a risk pool with everyone else in your policy that’s essentially a hedge against some catastrophic loss, everyone in the pool pays for each loss and it spreads the burden out, rather than a single member losing their home or going bankrupt.
For the home insurance example, when you have insurance companies that cover risk pools in one geographical area, especially smaller agencies that are regional, they have to hedge against the risk of a catastrophic loss so large the risk pool can’t cover it (like California wildfires) So they enter into an even large risk pool with other insurance companies.
This chain can actually go on for a while with several layers of reinsurance.
So while you do hire a company to manage the risk pool, really the risk is divided amongst the members/policy holders in the pool.