Insurance and Odds

[211º]

Earlier today I completed a bit of a thought experiment.

Given: (1) 99 friends and I each have an airplane valued at $50,000 each and (2) each year we pay an insurance company $1,200 for hull value insurance.

Assume: (1) liability insurance is not included or is addressed elsewhere, (2) insurance company wants to on-average "just break even," and (3) airplanes are "totaled-out" when they wreck

Determine: How many planes should be totaled each year?

Solutions: Collectively, the insurance company receives $120,000 per year from all of us. If each plane costs/is insured to $50,000, then the insurance company assumes about 2.4 ($120k/$50k) planes will be totaled per year.

Or in other words, there is about a 1 in 42 (100/2.4%)chance that I'll call my insurance company about my planed being totaled each year.

Agree or disagree?

[carusoam]

Compare the calculation to reality around here…

If one in 42 MSers lost a plane each year….

We would be circling the wagons trying to figure out what we are collectively doing wrong… fin 1980s thread regarding GU landings…   often one each week…. Mostly non-MSers….

 

There is a significant number of GU landings… and expensive ground strikes…

 

But…. 42 years is almost a lifetime of flying….  And we know, everyone should expect an engine out at least once in their flying career… depending on when you start and when your insurance price makes you stop…

How many years do Mooney owners have a Mooney… often start in their 30s and end in their 90s… 60 years. A few outliers start earlier… and a couple go longer….

Pp thoughts only, not a stats guy…

Best regards,

-a-

[hubcap]

Disagree.

In your model the insurance company assumes their payout will equal the premiums collected.

The insurance company is in business to make a profit…not break even.

[carusoam]

1 minute ago, hubcap said:

Disagree.

In your model the insurance company assumes their payout will equal the premiums collected.

The insurance company is in business to make a profit…not break even.

But he covered that in his assumptions…

So….

Should we refine his model and add a particular margin of profit for insurance companies?

What should an insurance company do to calculate their margin… cost X2,   Cost +15%, cost + rental of the biggest sky scraper in the center of your favorite major city?

 

Visited Boston recently, and some cities in SC…. Lots of tall buildings with insurance company names right on them….

Where are the duck and gecko hanging out lately…?

-a-

[Pinecone]

Remember, you are also paying for advertising. For the company to have a location.  For the computer and phone systems.  And paying all the people.

 

THEN there is the profit.

[hubcap]

8 hours ago, carusoam said:

But he covered that in his assumptions…

So….

Should we refine his model and add a particular margin of profit for insurance companies?

What should an insurance company do to calculate their margin… cost X2,   Cost +15%, cost + rental of the biggest sky scraper in the center of your favorite major city?

 

Visited Boston recently, and some cities in SC…. Lots of tall buildings with insurance company names right on them….

Where are the duck and gecko hanging out lately…?

-a-

His assumption was that the insurance company collected $120k, and they expected claims to equal $120k…that looks like a break-even for the insurance company. If the actuaries expect to pay out $120k in claims the insurance company will probably want to charge a bit higher premium.

What am I missing?

[PT20J]

3 hours ago, hubcap said:

What am I missing?

Timing. Premiums are collected in advance of claims. During the time between collecting the premiums and paying claims, the money is available to the insurance company for investment. Warren Buffett calls it “float” and it’s the economic engine behind much of Berkshire Hathaway. So, even if aggregate claims sometimes exceed premiums, a well managed insurance company can make money.

[Hank]

5 hours ago, hubcap said:

What am I missing?

You're missing overhead! Salary and benefits for employees; insurance often carries significant commissions to the sales staff. Then they need a building / office with utilities, etc., and as mentioned above, some advertising. Plus travel for adjusters to visit and inspect claims.

[Parker_Woodruff]

On 6/5/2022 at 2:01 PM, 211º said:

Earlier today I completed a bit of a thought experiment.

Given: (1) 99 friends and I each have an airplane valued at $50,000 each and (2) each year we pay an insurance company $1,200 for hull value insurance.

Assume: (1) liability insurance is not included or is addressed elsewhere, (2) insurance company wants to on-average "just break even," and (3) airplanes are "totaled-out" when they wreck

Determine: How many planes should be totaled each year?

Solutions: Collectively, the insurance company receives $120,000 per year from all of us. If each plane costs/is insured to $50,000, then the insurance company assumes about 2.4 ($120k/$50k) planes will be totaled per year.

Or in other words, there is about a 1 in 42 (100/2.4%)chance that I'll call my insurance company about my planed being totaled each year.

Agree or disagree?

We see a good amount of claims for damage that are much less substantial than total losses, and they're costly.

Hull coverage is a good deal...

[aviatoreb]

On 6/5/2022 at 3:01 PM, 211º said:

Earlier today I completed a bit of a thought experiment.

Given: (1) 99 friends and I each have an airplane valued at $50,000 each and (2) each year we pay an insurance company $1,200 for hull value insurance.

Assume: (1) liability insurance is not included or is addressed elsewhere, (2) insurance company wants to on-average "just break even," and (3) airplanes are "totaled-out" when they wreck

Determine: How many planes should be totaled each year?

Solutions: Collectively, the insurance company receives $120,000 per year from all of us. If each plane costs/is insured to $50,000, then the insurance company assumes about 2.4 ($120k/$50k) planes will be totaled per year.

Or in other words, there is about a 1 in 42 (100/2.4%)chance that I'll call my insurance company about my planed being totaled each year.

Agree or disagree?

Poor man’s actuary.

Flat prior.

 

[aviatoreb]

On 6/5/2022 at 3:13 PM, carusoam said:

Compare the calculation to reality around here…

If one in 42 MSers lost a plane each year….

We would be circling the wagons trying to figure out what we are collectively doing wrong… fin 1980s thread regarding GU landings…   often one each week…. Mostly non-MSers….

 

There is a significant number of GU landings… and expensive ground strikes…

 

But…. 42 years is almost a lifetime of flying….  And we know, everyone should expect an engine out at least once in their flying career… depending on when you start and when your insurance price makes you stop…

How many years do Mooney owners have a Mooney… often start in their 30s and end in their 90s… 60 years. A few outliers start earlier… and a couple go longer….

Pp thoughts only, not a stats guy…

Best regards,

-a-

Is that right?  Where did you get that number 42 to engine out?

[Hank]

2 hours ago, aviatoreb said:

Is that right?  Where did you get that number 42 to engine out?

From the Poor Man's Actuary above . . . .

On 6/5/2022 at 2:01 PM, 211º said:

Earlier today I completed a bit of a thought experiment.

Given: (1) 99 friends and I each have an airplane valued at $50,000 each and (2) each year we pay an insurance company $1,200 for hull value insurance.

Assume: (1) liability insurance is not included or is addressed elsewhere, (2) insurance company wants to on-average "just break even," and (3) airplanes are "totaled-out" when they wreck

Determine: How many planes should be totaled each year?

Solutions: Collectively, the insurance company receives $120,000 per year from all of us. If each plane costs/is insured to $50,000, then the insurance company assumes about 2.4 ($120k/$50k) planes will be totaled per year.

Or in other words, there is about a 1 in 42 (100/2.4%)chance that I'll call my insurance company about my planed being totaled each year.

Agree or disagree?

 

[aviatoreb]

29 minutes ago, Hank said:

From the Poor Man's Actuary above . . . .

 

Oh - I had thought he might have a separate source.

[211º]

Yep. Poor Man’s, Rich Man’s, 220, 221…

Just recently paid my annual premium and was trying to see if I could see the insurance company's cards and what they were betting.

Given the above and assuming that advertising, overhead, salary, profit are half of what make up the annual rate, I think it is a safe assumption that the insurance company is betting that on average they'll pay out around $60,000 (in some form or split) to my 99 friends and me each year.

[0TreeLemur]

Risk >> hull damage

In 2021, one life lost cost the insurer somewhere between $1,000,000 to 5,000,000 (or more) if it goes to trial.   Google "social inflation".  It's the effect of highly "successful" attorneys convincing juries to levy severe punitive awards on perceived wrongdoers.

[jetdriven]

22 hours ago, hubcap said:

His assumption was that the insurance company collected $120k, and they expected claims to equal $120k…that looks like a break-even for the insurance company. If the actuaries expect to pay out $120k in claims the insurance company will probably want to charge a bit higher premium.

What am I missing?

Insurance companies can also pay out 100% of premiums in a year and still make a profit. They invest huge amounts of reserves.  

[EricJ]

21 hours ago, aviatoreb said:

Is that right?  Where did you get that number 42 to engine out?

The answer to life, the universe, and everything.

[Parker_Woodruff]

One thing to consider is salvage recovery.

If there are a lot of undamaged avionics in a plane insured for $60K, the loss might not be so bad.  Or if hail has turned the airplane into a golf ball, the engine core and avionics are still quite valuable.

Obviously these favorable ratios go away when we are talking about more expensive airplanes.

[A64Pilot]

On 6/6/2022 at 11:43 PM, 0TreeLemur said:

Risk >> hull damage

In 2021, one life lost cost the insurer somewhere between $1,000,000 to 5,000,000 (or more) if it goes to trial.   Google "social inflation".  It's the effect of highly "successful" attorneys convincing juries to levy severe punitive awards on perceived wrongdoers.

In Fl every other billboard has adds like Mike got me 5 million dollars for my accident. Every other TV ad says similar things, has the people attesting to it of course

First of course Mike gets half, but secondly I don’t believe the Ad.

Average driver in Fl carries the min insurence which is I think $10,000 https://www.flhsmv.gov/insurance/ 

Average net worth is $121,000 https://www.fool.com/research/average-net-worth-americans/

So where do the all the big numbers come from? How many have assets in the millions?

I assume a Jury could award a big number, but if the assets don’t exist, where is the money going to come from?

I think there is money in it of course or there wouldn’t be TV ads etc, but I believe actual million dollar awards are very few and far in between

[A64Pilot]

But to continue with the insurence thing, I don’t know about aircraft, but a significant portion of the insurers liability for a boat comes from environmental clean-up etc, it’s not really just hull value. Run a boat aground on a reef, the insurence company has to pay your hull value, but it’s the clean up that’s the big bill.

I learned this when I increased my hull value on the boat and the bill didn’t go up nearly as much as the hull value did. I suspect it’s similar in aircraft, we only think of our hull value, but the insurence company could be on the hook for another aircraft, damage to property, recovery and I assume clean-up.

Of course they make money, but I suspect not much, because free enterprise works, if they were making gobs of money, other companies would jump in and competition would drive the price down.

However I’ve seen insurence companies dump segments too, many are dumping boats in the Caribbean for instance from obviously lack of profits.

We don’t want that to happen with aircraft

[0TreeLemur]

11 hours ago, A64Pilot said:

In Fl every other billboard has adds like Mike got me 5 million dollars for my accident. Every other TV ad says similar things, has the people attesting to it of course

First of course Mike gets half, but secondly I don’t believe the Ad.

Average driver in Fl carries the min insurence which is I think $10,000 https://www.flhsmv.gov/insurance/ 

Average net worth is $121,000 https://www.fool.com/research/average-net-worth-americans/

So where do the all the big numbers come from? How many have assets in the millions?

I assume a Jury could award a big number, but if the assets don’t exist, where is the money going to come from?

I think there is money in it of course or there wouldn’t be TV ads etc, but I believe actual million dollar awards are very few and far in between

Mike gets money by suing people who have insurance and/or assets.  As you wrote, uninsured motorists are not often wealthy.  Big settlements yield very little gain from them because they don't have assets.  Insured motorists on the hand represent potential deep pockets for personal injury/accident lawyers.   First, if you have liability insurance your insurance company is on the hook.  Second, if the award exceeds the insurance liability limit, then they go after policy owner's assets, garnish wages, etc.

Airplane owners are great targets for injury lawyers for the obvious reasons.

[RobertGary1]

The reason rates are up is because underwriters left the market because it’s not profitable. That tells you something