So how do insurance companies make money?  Simple, insurance companies pool risk and then determine what premium to charge.  They know that if you insure 100,000 drivers in a specific location, let’s say the Sacramento area for example, some are bound to get into accidents and on those policies the company will lose money.  The key is to have more policyholders who don’t need to their insurance to pay for those that do.  This is the job of actuaries… to determine how much risk to take on and how much corresponding premium to charge.   The bottom line goal is to bring in more premium than is spent on claims and expenses.

Surprisingly, sometimes insurance companies may not want too much business in a specific region.  Florida is an example, especially in coastal regions.  If one company has too much market share in a specific area, they are heavily exposed in cases such as a hurricane for example.  In cases like this where there is over saturation they may stop writing new policies in a specific region or even an entire state.  Think of the insurance companies that had a high “PIF” (Policies in Force) during Hurricane Andrew in 1992.  They took huge hits and a storm of that magnitude if a company is over exposed could put a carrier out of business.

Each state has a Dept. of Insurance (or something similar sounding) that helps to regulate the industry and make sure that all carriers are following the laws for that state, adhering to regulations about how much cash or other liquid investments they must have available, etc.  This is kind of why you hear in the news about why can’t health insurance be sold across state lines.  It’s because each state has it’s own laws and regulations that need to be followed.  Because of this, some carriers choose to not even do business in some states because it’s not worth the hassle or the risk is too high (such as in Florida).  That’s why homeowners insurance in Florida is so expensive… high risk coupled with high regulations = high premiums.  Unfortunately for our friends in the Sunshine State, this likely won’t change anytime in the near future.

-Damon

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