One major reason is sometimes insurance companies are not tight enough on underwriting. This means that they do not carefully screen applicants, and then end up insuring people who are too great a risk. If a person is overweight, has high blood pressure, and smokes, that person may be a real risk. If they insure too many people like this, they could end up losing money. Another reason could be poor administration. Administration adds cost to all products and services. If a company is not streamlined or is not seeking to increase worker productivity, they can end up losing money. Another problem could be that they have priced their insurance plans below market value. Often companies do this to get “market share,” but if their prices are too low they will not have adequate income from premiums to pay for their claims. Do all of these things happen? Sure! Just a couple of years ago two large insurance companies in Arizona went bankrupt.
What do we get from this? Well, tight underwriting and plans that are close in price to plans from other companies are probably signs of a good healthy insurance company. Although we don’t like not getting a “live person” when we call the insurance company, we need to remember that they are trying to cut their service costs.
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