If insurance companies are borrowing money to pay off claims, aren't they basically a sort of ponzi scheme since the claims of one generation rely on the premiums of the next? ? - Seedly

Personal Finance 101 (LLI)

Asked by Anonymous

Asked on 05 Dec 2018

If insurance companies are borrowing money to pay off claims, aren't they basically a sort of ponzi scheme since the claims of one generation rely on the premiums of the next? ?

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Good Day Every Day
Good Day Every Day
Level 6. Master
Updated on 07 Jun 2019

Whether it is a ponzi scheme, to me, it is not important. What is crucial is you need to know what they are doing with your money. The insurance companies are investing your money to generate higher returns so that they could pay out the money during a claim and still makes a decent profit. That is why AIG (Parent company of AIA) runs into financial trouble and needs to be bailed out during the 2008 financial crisis. Just my humble opinion.

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Good Day Every Day
Good Day Every Day

06 Dec 2018

Thanks. Corrected.
Loh Tat Tian
Loh Tat Tian
Level 6. Master
Updated on 06 Dec 2018

The thing is, insurance company have all the claim experience and data numbers. They would not price themselves to make losses since they are a business.

Even if they did, only one segment is making loss, while they are earning more in other segments. Insurance companies also have their own buildings, so it's a lucrative business for insurers themselves (at least for the past 100 years).

Edit: Also, they function like the bank segment. They have to set aside a portion of the premiums (which they projected) which cannot be used to do investment or other items. This pool is used first, before income from other business units.

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Lok Yang Teng
Lok Yang Teng
Level 6. Master
Answered on 05 Dec 2018

Technically not since everybody is contributing in the same generation, but the odds of a person needing the insurance within the same generation isn't that high generally. The lower the odds, the higher they profit.

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