It struck me the other night, as I was reading a book and came upon a section on Ponzi Schemes, that insurance companies are borderline ponzi’s themselves. The definition of a ponzi scheme is when the broker/banker/agent takes money and promises a unusually high return and then pays said return from the incoming money from other investors. Eventually, when the incoming investors dry up, the agent can no longer pay the returns and the scheme comes crashing down.
Now, let’s look at insurance companies. We, as the insured, pay the insurance company our premiums in return for insurance against some sort of event. With health insurance it’s against some sort of health event. With car insurance, it’s against some sort of accident. In any case, it’s a payment. Or a return on the premium. Very seldom will you actually come out with your entire investment. What would happen if the premium payers dried up? It would get more difficult for the insurance companies to pay any claims.
Where the key difference lies is that if you stop paying your premiums, they stop paying any claims for you. Also, as a premium payer, you never really expect your money back unless you have a claim. You’re paying for the “in case”, if it were to happen. In a Ponzi, you’re investing your money specifically for the return. You’re not going to stop investing as long as the returns are stable. And a Ponzi only really dies when the new investors stop coming. If new insured stopped coming to the insurance company, they would still have their current insured to collect premiums from.
So, no. Insurance companies are not Ponzi Schemes. But, it sure feels that way sometimes.
Photo Credit: Showmeone @ Flickr
More from my site