No, that's not accurate. The time delay doesn't converge to 0 just because payouts match incoming premiums. Here's why:
Think of it like a water tank:
- The tank contains 66B gallons (total liabilities)
- 30B gallons flow in annually (new premiums)
- 30B gallons flow out annually (claim payments)
- The tank stays at 66B gallons (stable liability pool)
Even though the annual inflow equals the outflow (30B), it would still take about 2.2 years to drain the entire tank (66B/30B = 2.2) if you stopped adding new water. This is the average time delay.
The matching of annual inflows and outflows just means the system is in steady state; it doesn't affect the average duration of how long money stays in the system. That duration is determined by:
- Total liability pool ($66B) divided by
- Annual payout rate ($30B)
Another way to think about it:
- Each premium dollar collected today is promised against future claims
- Those future claims are spread out over the next several years
- Even as old claims are paid, new premiums create new future obligations
- The ratio of total obligations to annual payments (66/30) determines the average delay
So while the annual cash flows may match, the time delay is a structural feature of how insurance obligations are spread out over time. The matching of annual inflows and outflows maintains the system's stability but doesn't eliminate the time delay inherent in the insurance model.
It is intrinsic to the nature of insurance that there is a time delay. Even if the insured were to suffer a loss on the same day that they paid their premium, there will still be a delay. Even the most efficient, benevolent insurance operation cannot process a claim, value a loss, and settle the claim within a day.
I get how you can have a profitable steady state in with equal inflow and outflows given a surplus tank.
I get how even an immediate claim takes time to settle.
Would you agree that this puts an upper limit on the loss they can run? If more aggregate auto claims are submitted than premiums paid in a day, you can only make interest on they delay duration. If payout delay is say 3 months, annual interest is 4%, you break even at a 1% loss on premiums, right?
If you are consistently drawing down your float to pay claims instead of adding to it, you are better off leaving the auto insurance industry and simply operating an equity investment firm.
> Would you agree that this puts an upper limit on the loss they can run? If more aggregate auto claims are submitted than premiums paid in a day, you can only make interest on they delay duration. If payout delay is say 3 months, annual interest is 4%, you break even at a 1% loss on premiums, right?
Of course there is an upper limit on losses they can run. The upper limit is base on their investment returns and the time frame. The time frame is longer than you think. Based on a quick run of the numbers it is measured in years.
> If you are consistently drawing down your float to pay claims instead of adding to it, you are better off leaving the auto insurance industry and simply operating an equity investment firm.
They are continually replenishing the float at the same time. The whole point is that they are operating an equity investment firm, except the investment capital comes from a revolving pool of insurance premiums instead of some other pool of money.
There's something I'm still not getting. Car insurance should not have a significant lag because the probability of claim is not related to the date of policy. I'm just as likely to get in an accident on day 1 of my policy as day 1,000.
If daily claims meet or exceed the daily premium, the only time available to earn interest is between premium receipt and claim payment.
Imagine founding an insurance company and on day one you receive $100 in premiums and $100 in claims.
Think of it like a water tank: - The tank contains 66B gallons (total liabilities) - 30B gallons flow in annually (new premiums) - 30B gallons flow out annually (claim payments) - The tank stays at 66B gallons (stable liability pool)
Even though the annual inflow equals the outflow (30B), it would still take about 2.2 years to drain the entire tank (66B/30B = 2.2) if you stopped adding new water. This is the average time delay.
The matching of annual inflows and outflows just means the system is in steady state; it doesn't affect the average duration of how long money stays in the system. That duration is determined by: - Total liability pool ($66B) divided by - Annual payout rate ($30B)
Another way to think about it: - Each premium dollar collected today is promised against future claims - Those future claims are spread out over the next several years - Even as old claims are paid, new premiums create new future obligations - The ratio of total obligations to annual payments (66/30) determines the average delay
So while the annual cash flows may match, the time delay is a structural feature of how insurance obligations are spread out over time. The matching of annual inflows and outflows maintains the system's stability but doesn't eliminate the time delay inherent in the insurance model.
It is intrinsic to the nature of insurance that there is a time delay. Even if the insured were to suffer a loss on the same day that they paid their premium, there will still be a delay. Even the most efficient, benevolent insurance operation cannot process a claim, value a loss, and settle the claim within a day.