> Actually insurance companies make money by arranging to have a utility
> function that is differs from their customers.
>
> Customers (except maybe for a few confused ones like you) expect to
> get a
> negative return on the premiums they pay. The are willing to give the
> insurance company that positive return in order avoid financial risks.
> It is not necessary that the customers overestimate the risk.
This is not at all in contradiction to what I wrote. Insurance
companies of course can make money with everybody properly assessing
risks, and as they've got administrative costs, the average return for
customers must be negative.
However, insurance companies can make more money, if competitors and
customers overestimate the risks, because otherwise competition drives
insurance rates down close to what is justified based on real risks +
administrative costs + return on capital employed demanded by the
marginal investor.
On the other hand, more hurricanes or more crime does not reduce
insurance company profits. Far from it, if there's hardly any burglary
in a country say, insurance companies are likely to make fewer profits
than in a country with lots of burglaries. After all, with no risks to
insure, there is no reason to buy insurance.
Besides, it's a very specific type of insurance company that we are
discussing in this thread, and it's not health insurance or car
insurance or property insurance to individual customers; it's rather
the handful of big reinsurance companies, and most notably Munich Re.
Munich Re would like people to believe they are threatened by a rise
in weather related disasters. That's rubbish. It would be true, if
insurance rates were fixed, and the number of customers paying these
rates were fixed also, but disaster related damage was note. If this
was so, then Munich Re's profit would be a direct function of disaster
related damaged and their business would get squeezed into bankruptcy
by rising payouts.
In truth they've got a very strong profit motive to exagerate damage
trends.
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