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.
What Is a Ponzi Scheme?
The definition of a Ponzi scheme is when the broker/banker/agent takes money and promises an 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.
Ponzi schemes are named after Charles Ponzi, an Italian immigrant who was the original Ponzi schemer. In recent years, the most famous (and longest lasting) Ponzi scheme is attributed to Bernie Madoff. Madoff’s Ponzi scheme is thought to have begun in the late 1980s or early 1990s and didn’t end until 2008 when he was arrested. This Ponzi scheme cheated nearly 5,000 customers out of $60+ billion dollars.
Insurance Companies Are Set Up Like Ponzi Schemes
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. And, unfortunately, you often have to fight for the payment. Health care coverage may be denied if the health insurance company doesn’t find the treatment worthy of the expense or if they deem it experimental. Likewise, if you file a home insurance claim too many times, the insurance company can choose to drop you as a customer.
For the most part, insurance companies are in charge and decide when to cut customers. But what would happen if the premium payers dried up? It would certainly get more difficult for the insurance companies to pay any claims.
How Insurance Companies Are Different from Ponzi Schemes
Where the key difference lies is that if you stop paying your premiums, the insurance company stops 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. However, as the years go on with no new insured clients and the current clients age, the insurance company could have difficulty paying claims.
Even though insurance companies seem to fit many of the criteria for a Ponzi scheme, no. insurance companies are not Ponzi Schemes. But, it sure feels that way sometimes.
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Melissa is a writer and virtual assistant. She earned her Master’s from Southern Illinois University, and her Bachelor’s in English from the University of Michigan. When she’s not working, you can find her homeschooling her kids, reading a good book, or cooking. She resides in New York, where she loves the natural beauty of the area.