Captive Vs Independant

   How do Insurance Carriers make money on Home, Auto, & Business policies? 

   Premium is the amount of money an individual or business pays for an insurance policy. For every $1 in premium received per client, approximately 70 cents of it goes to paying claims. Around 17 cents goes into paying for marketing and/or agency commissions. Then probably say 10 cents for other overhead and administrative costs. 

    Today, there are hundreds of tech insurance companies (known as Insuretechs) in the industry that have tried to disrupt the market. Most have FAILED and eventually create a product available to the individual agencies scattered throughout the states like Northshire Insurance or the shut down altogether. 

    Most insurance carriers in any given year and state LOSE money on their underwriting model. They collect premiums on “risk”, aka your car, home, or business, to try and collect more premiums than they pay out in claims. Insurance carriers rely on EXCLUSIONS to keep their loss ratio low -- this makes insurance affordable. Without this, say, for example, wear and tear or mold were usually covered, insurance would become unaffordable for most. Remember that about 70% of every dollar an insurance carrier receives goes directly into paying claims. 

So why are insurance carriers able to remain profitable and why are their book asset sizes so impressive? 

    It is Because you float your money to them. Before an insurance carrier provides coverage, they first collect your premium. Statistically, most people will not file a claim in their first insurance policy term. As time passes, the insurance company will be holding on to hundreds of millions and billions of dollars that have yet been needed to pay for a claim.

    The insurance carrier is investing your money this entire time.

    That's often how they can stay in business and maintain an acceptable profit ratio. 

    For now, this is the best model so far. Even though we all hate paying for insurance, it could easily be so much more expensive than it is. 

    We have customers paying less than $500 a year for their car insurance, and if they crash into someone and injure another person. To where they need a $44,000 surgery, for example, the insurance carrier will pay the entire thing. 

    The current model has many flaws, but it's the best solution we have found to date and is widely accepted. Insurance regulations and laws help keep our assets and families safe from worst-case scenarios! 

   (Though Article is written for Vermont, it is highly applicable for all states) 

   I sue people for a living. In other words,  I'm the person you are protecting yourself against when you buy an insurance policy.

  So the question is: what is the minimum amount of insurance you need to avoid the financial disaster I can cause? You need four policies: health, automobile, home or renters, and an umbrella.

  First, I know that everybody who calls Northshire Insurance for a quote is mostly thinking about getting the cheapest insurance possible. That’s true for me too  - I wanted to save a few bucks when I called Northshire Insurance  (and by the way - Jeffrey did save me some money on my premiums). But the real reason to have insurance is to avoid bigger financial problems down the road. You need just enough insurance coverage to protect your assets.  

  A personal injury lawyer like me is looking for insurance available to you and assets available to take from you (or “attach” in legal terms).

  Do you have assets? 

  If you are reading this, the answer is probably “yes.” Here’s how I find out if you have assets.

  When I am deciding whether to sue someone who has accidentally caused an injury (by distracted driving for example), I am looking for whether that person has assets and whether there is insurance coverage.  First, I Google them.  I’m looking for an indication that they have a profession, or have written articles, or are pictured on a golf course or ski vacation. I’ll assume they have assets if any of these are true.  If I Google my own name, “Tristan Larson”, I can see that I’m a lawyer, that I seem to own some businesses, and I can see photos next to a fairly nice home. I can follow up on this search by looking on the Vermont Secretary of State’s website and find that I own two law office businesses and sit on the board of at least one non-profit.  If I was deciding whether it was worthwhile to sue myself, these would be pretty good indications that I have some assets available. 

  The next thing I could do is hire a private investigator to do an asset search.  Private eyes can do a few things for me - mainly find real estate, vehicles, and bank accounts in a person’s name. For a few hundred dollars, I can find out whether there are likely some assets that could satisfy a judgment against any Vermonter.

  So, do you have assets that could be taken? If not, you may be judgment proof and, as the saying goes, you can’t get blood from a stone. 

  Vermont has some specific rules about assets that can NOT be taken from you in a lawsuit. Not surprisingly, these include some very old-fashioned items like:

• ten cords of firewood, five tons of coals, or 500 gallons of oil;
• 500 gallons of bottled gas;
• one cow, two goats, 10 sheep, 10 chickens, and feed sufficient to keep the cow, goats, sheep, or chickens through one winter;
• three swarms of bees and their hives with their produce in honey;
• one yoke of oxen or steers or two horses kept and used for teamwork;
• two harnesses, two halters, two chains, one plow, and one ox yoke;

  Yes. That is current Vermont law, and you can read more of this list here.

  But apart from your sheep and goats, there are some items that are not subject to a judgment in civil court in Vermont that are really protective of your assets:

• The first $125,000 in your home
• The first $2,500 in your car
• Your retirement accounts
• Your Social Security benefits, disability, or workers’ compensation benefits
• Anything you own “by the entireties” with your spouse (usually real estate that you purchased together while married)

  Look at that list and think about keeping your firewood and those items. Would that be enough? If not, buy insurance.

  You need health insurance. I don’t need to tell you this.

  You need at least $100,000/$300,000 in coverage on your vehicle.

  Vermont requires that all vehicles carry $25,000 in liability insurance per person and $50,000 per accident along with $10,000 in property damage insurance.  This is obviously not enough to do much if you accidentally cause a serious vehicle crash.  A full-size pickup truck or minivan costs upward of $50,000, so obviously, this isn’t going to be enough insurance coverage to cover the costs of a bad crash (or even a pretty minor one).

  But there’s another reason why this isn't enough coverage.  That money protects other people, but it also protects you. First, if I sue you on behalf of a person who was in a crash with you or someone else driving your car, that isn’t going to be enough money to cover you.  So I will also try to take away any financial assets you have.  Second, you will not have any insurance to cover yourself if you are the victim of a car crash with a minimally insured driver.  Underinsured motorist coverage comes with this insurance and means that if you are injured by someone who has no insurance (which happens all the time!) or someone who bought only $25,000 worth, you will be covered by your own policy.  It’s pretty easy to have a hospital bill for $100,000, so this is a good idea.

  If you have a mortgage, you have to have homeowner’s insurance.  Of course, this coverage protects your house from fire, etc., but it also covers you and your family from lawsuits for injuries that happen on your property or elsewhere.  As a personal injury lawyer, I have gotten insurance money from homeowners’ policies for injuries caused by skiing into someone, from a teenager throwing a can of spray-paint onto a bonfire (don’t do that by the way - really really and go tell your teenager not to do that), and publishing unauthorized photographs.  These are injuries that people caused (usually teenagers by the way) that weren’t caused by driving a motor vehicle.  

  This is the cheapest insurance going. My umbrella policy costs about $100 per year and provides a LOT of coverage in case the other policies don’t (i.e. if I get sued for a lot more money than is available in the automobile policy). This is the capstone of the insurance plan described here. 

  My advice is to get an umbrella policy, and the two or three policies that the umbrella requires (automobile liability and homeowners/renters). If you have money in a bank account or real estate worth more than $125,000 or have investments that aren’t retirement savings, these policies will protect you if an injury lawyer comes calling.

Tristan Larson, Esq. is a personal injury, divorce, and medical malpractice lawyer at Larson & Gallivan Law, PLC.