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Don't private health insurance cos. invest your premiums on the market?

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Hello_Kitty Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:05 AM
Original message
Don't private health insurance cos. invest your premiums on the market?
Doesn't that mean if they make bad investments and lose money, that they get to raise your premiums? Doesn't that also make them, in the case that they become the primary deliverer of health care under a "universal" system, too big to fail? Does that mean that if Humana invests in the next Enron, or investment bubble, or Bernie Madoff that we taxpayers are on the hook to bail them out?
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subcomhd Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:11 AM
Response to Original message
1. I think so HK.
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raycathode Donating Member (2 posts) Send PM | Profile | Ignore Sun Aug-23-09 01:19 AM
Response to Reply #1
3. This Is Why They Oppose The Public Option:
Edited on Sun Aug-23-09 01:26 AM by raycathode
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alittlelark Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:57 AM
Response to Reply #3
16. Hi! Welcome to DU!
:hi:
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Teaser Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:18 AM
Response to Original message
2. some do. they use some complicated risk-reward formulae
Edited on Sun Aug-23-09 01:18 AM by Teaser
to determine the probability of a certain number of a certain kind of illnesses that cost them so much money, and compare the probabilities of market swings of particular sizes. Nearly all of the time it works out. But it's econostatistics, so of course there is some finite and non-vanishing probability of error.
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Hello_Kitty Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:29 AM
Response to Reply #2
7. But even if they factor in all of those things
Edited on Sun Aug-23-09 01:30 AM by Hello_Kitty
While investing a certain percentage of premiums in credit default swaps or mortgage backed securities or whatever, if they lose money, don't they have to raise premiums? And if they are the "universal health care" for the country, don't we taxpayers have to bail them out?
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Cessna Invesco Palin Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 02:02 AM
Response to Reply #7
19. No. No no no no no.
As has been explained to you repeatedly in this thread, insurance companies do not get to arbitrarily raise premiums due to their poor investment strategies. Furthermore, their investment strategies are regulated to reduce risk and maintain capital. This is why, with the notable exception of AIG, you do not see insurance companies begging for a government bailout. You keep asking this question, and it keeps getting answered the same way.
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jtrockville Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:21 AM
Response to Original message
4. Invest? I thought they just forked it over to the CEO.
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Oregone Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:44 AM
Response to Reply #4
11. Thats not how capitalism works
CEO pay is an expense.

They are compensated in order to facilitate the growth of even more profits (or as favors). Profits are disbursed to shareholders. Shareholders get paid for owning the means of production, or in other words, being grand descendants of plantation owners and sweat shop operators. CEOs are never supposed to be paid more than they are calculated to be "worth", being that such pay would infringe upon the profits of the shareholders, and thereby, conflict with the purpose of that company's very existence (to help rich people get richer by doing nothing: capitalism).
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Hello_Kitty Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:51 AM
Response to Reply #11
13. And yet CEOs manage to get handsome packages even when companies are failing.
What they can't earn in compensation for performance they more than make up for in "golden parachutes".

In the case of health insurance cos. they are rewarded for the number of policyholders they can kick off the plan for "pre-existing conditions". Watch Wendell Potter on Bill Moyers to see how that happens.
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Igel Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 12:53 PM
Response to Reply #13
28. Because you have the wrong definition of "performance".
Think of how many view Obama's stimulus. Under the stimulus, millions of jobs have been lost and the GDP has shrunk. It's an utter failure, right?

"Ah," many say, "but look at how many jobs were *saved*! The stimulus worked!"

Same with management performance. A wise board--"wise" here is contrastive and entails a comparison with a "foolish board"--will evaluate the CEO and his team carefully. They'll look at what they did: Were their choices sound? Was the business environment really predictable ahead of time, or only in hindsight? Did they do the best to mitigate damages? Have they done what is necessary, given the condition they found the company in, to make the company profitable or otherwise in accord with board mandates?

I watched a board give their CEO comparatively large bonuses as he destroyed the organization but made profits. The "profits" were accidental--in fact, if you look at how his organization faired in the early '90s it did sub par. He put in the minimum amount of time, played board politics instead of dealing with finances, and was lax and made many unsound decisions. He didn't earn his bonuses. The board was foolish. I joined the board and 11 months later I helped collect the CEO's keys and ordered the IT division to suspend his passwords after we caught him out-and-out lying to the board to save his hide. Two years later we had a new CEO, and we were losing money. The CEO was making sound decisions and undoing the damage, working 52 weeks out of the year, 60 hours a week, and getting the organization on a sound footing. There were calls for giving her no bonus since, well, the only possible good performance is being in the black. We gave her a performance bonus and got reamed out in the local press. We were forced in the next year or two to restrict her bonuses, and after I left the board and the organization was in the black the board again demanded that the CEO play politics and cozy up to the board members. She was fired/left after a couple of turbulent years, and it didn't take long for large bonuses to be awarded again for shoddy performance and sparkling flattery, and then for the organization to again be in the red.

You also have to watch the details in the "handsome packages". A lot of time the packages include retirement benefits (do you want your retirement benefits, if any, included as current income?) and deferred income (i.e., income that was awarded in previous years but not taken because, perhaps, the employee didn't want the tax consequences or the company would have trouble swinging the payment, politically or financially). Often they include stock options, guarantees to allow the CEO to buy stock at a given price regardless of market price. One notorious case recently cited had something like $17 million in stock options that could only be exercised after a few years, but the $17 million figure was based on the stock's worth when the compensation package was finalized. Oops: the guaranteed price was $53-something and the stock price a few days ago on the NYSE was $44. That $17 million in income is nonexistent, and only finally stops being <$0 when the stock price hits $53-something.
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Cessna Invesco Palin Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:27 AM
Response to Original message
5. Let's have a contest: How many loaded words can you fit into one post?
All you're missing is "off the table."
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Hello_Kitty Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:35 AM
Response to Reply #5
8. Okay. You win the thread. Congratulations.
Do you have anything substantive to add?
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Cessna Invesco Palin Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:59 AM
Response to Reply #8
18. Yes.
You don't understand how investment in the insurance industry works. At all. See various other posts in this thread for a brief education.
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Hello_Kitty Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 02:14 AM
Response to Reply #18
22. See how I am receptive to explanations
Because my post was intended to be an opportunity for me to learn. Then you can go fuck yourself. Because you are an asshole. :hi:
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Cessna Invesco Palin Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 02:21 AM
Response to Reply #22
23. My apologies.
There are a great many people on here who post rhetorical questions in order to boost their own position. I see from your further responses in this thread that you aren't one of them. I judged you hastily, and for that I am sorry.
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Hello_Kitty Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 02:35 AM
Response to Reply #23
24. My apologies too. I was a bit too quick with the snark.
:toast:
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AdHocSolver Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 02:55 AM
Response to Reply #18
25. One doesn't need to know what they do with the money to know we are being ripped off. n/t
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MercutioATC Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:28 AM
Response to Original message
6. The answer to your OP subject line is yes.
Insurance companies frequently invest premium income.

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Hello_Kitty Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:37 AM
Response to Reply #6
9. So if they lose money, under "universal coverage", do we have to bail them out?
Is there anything in the health care plan that regulates the kind of investments they can get into?
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MercutioATC Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:43 AM
Response to Reply #9
10. I don't believe that the proposed health care legislation addresses that issue.
...but I don't know of any reason we'd be required to "bail out" health care insurers under what I've seen of the current proposal.
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Hello_Kitty Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:45 AM
Response to Reply #10
12. But if they lost all their money, how would they pay our claims?
Seems to me they would require a bail out.
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Yavin4 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:58 AM
Response to Reply #9
17. They're Regulated By The States As To WhereThey Can and Cannot Invest
They cannot take all the premium money and invest it in high risk stocks. They have to maintain capital reserves to cover claims and they can invest a portion of the premiums in safe assets like T-bills and state bonds.
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Yavin4 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:54 AM
Response to Original message
14. Yes, They Do, BUT Each State Regulates What They Can and Cannot Invest
I took a derivatives course at NYU, and I learned that insurance companies are regulated by states as to what and where they can invest. They're restricted from investing in too risky assets. Thus, they could not invest with Madoff. State insurance regulations are in place to ensure that insurance companies have enough capital to cover claims.


Now, the Republicans probably want to deregulate them from this rule and allow them to invest willy, nilly.
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Hello_Kitty Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 02:05 AM
Response to Reply #14
20. I took the same class in AZ.
I was told that insurance companies had to maintain a certain ratio of claims to premiums, and that the state could step in and make them raise premiums when it got too big. So I think you are right but I've heard things about health insurance companies investing in mortgage backed securities (which were considered very safe until recently) and passing the losses onto policyholders.
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Yavin4 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:25 PM
Response to Reply #20
29. If The MBS Were Rated AAA Then They Could Invest In Them
And some probably did, which is one of the reasons why we needed the $750 billion bailout.

What should really worry you is that the Republican plan calls for selling insurance across state lines, which means that the Health Insurance cos. will all relocate to regulation friendly states, i.e. Republican controlled states like S.C. or Miss. This will allow them to gamble at will with premiums, and then when you need coverage, they'll just say, "Oh well, we don't have the money for your claim."
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TreasonousBastard Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 01:56 AM
Response to Original message
15. Losing investment income doesn't mean raising premiums...
most of the time.

All businesses invest spare cash in some way-- having cash lying around is just bad business. Insurance companies have a lot more cash lying around than most other companies, so they invest more. They are normally regulated in the ways they can invest, and the better managed companies don't fool around with risky investments anyway.

But, should they lose money in these investments, which happens, they can't just raise premiums to make it up. Many of the premiums are regulated, and they have to file for rate increases. Other premiums just won't stand up to increases, and they will lose business.

Ratemaking involves looking at the past five years of claims and estimating how many claims are still out there that haven't been reported yet. Then one adds inflation factors and some additional for expenses and profit and comes up with a rate. This rate is not always the one you get after the regulators get hold of it, your negotiations with reinsurers, and the competition gets wind of your pricing.

I don't know that much about health insurance companies, but historically there have been property/casualty lines that have been happy to underwrite to around a 100% loss ratio and make up the difference in investment income. Life insurance is based on the company making investment income. In all cases I know about, except maybe some mutuals, if the company takes a bath on its investments, its the company's problem, and not dumped off on policyholders.

(AIG was a completely unique situation, and its doubtful we'll see anything like that again)



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Hello_Kitty Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 02:11 AM
Response to Reply #15
21. Great explanation. Thank you. eom.
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snot Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 04:18 AM
Response to Original message
26. Not necessarily; they could just pay the $ to themselves & colluders as bonuses & kickbacks.
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MineralMan Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Aug-23-09 08:25 AM
Response to Original message
27. Nah, they just give it to their executives, who invest it
in Swiss bank accounts...
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