You can afford it

This post just happened to get lodged in my feedreader, and I just happened to read it.  Nothing out of the ordinary, I’ve seen this argument in one form or another about — hold on while I count — I’d say about eleventy-billion times.  The post takes issue with Allstate canceling policies in certain coastal counties of New York.  Now, readers of this blog know that Allstate has a strategy of pulling back from what it believes was overextended risk in the homeowners insurance market.  I’m not here to defend Allstate, but just talking in general, doesn’t it seem like that argument is kind of tired? Do I say a restaurant owner should keep his restaurant open even though he is losing money merely because I like to eat there?  What if he’s a multi-millionaire many times over, should he lower his prices because he’s making enough money and I like cheap food?  Do I tell a doctor he should continue to practice in a high risk area of medicine even though he could make more money and feel more secure with another type of practice? If I go to a doctor for, I don’t know, cosmetic surgery do I say he should charge me less because I know he just bought a 42-foot boat?

Do I withhold  certain sums of money that the IRS claims I owe the government because they already have more than they need? Let’s put it another way.  Say there is a lawyer who has a colleague, and the lawyer finds out the colleague is completely alienating clients, making a horse’s arse out of himself, losing business.  Should the lawyer keep him on his cases because by the standards of many people he has enough business and is making enough money? What if your brother-in-law likes to juggle knives, but he’s terrible.  Are you supposed to sit there when he whips out the blades?  If Allstate is missing a good bet by not underwriting these policies, that is some other company’s gain, and something for which they will have to account to their stockholders.  Why does it matter if they made money or lost money? If you have a lousy employee do you keep her because your company posted record profits? Just asking, that’s all.

7 Comments

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7 Responses to You can afford it

  1. Tex Mex

    The post states that Allstate is “cancelling” policies. I believe they are non-renewing – a slight difference.
    The post describes the practice as “legalized mugging”, citing the all too familiar arguements.
    I like your analogies. Here’s another: If today, McDonalds closed its sole restaurant on an island now inhabited by a single individual and only customer, that customer can hardly complain of being mugged, legally or otherwise, on the sole basis that a BigMac was purchased there just yesterday.
    But, but, but, McDonalds makes billions and billions, right? How can this be? Have they no customer loyalty? Have they no appreciation for the countless burgers and fries I’ve purchased over the years?

  2. Jason Barney

    It’s also analogous to my lifer insurer wanting to know if I fly airplanes, race motorcycles or skydive. They may choose to not insure that risk or if they do, at a higher price.

  3. Your examples sound good but are completely and utterly flawed. The restaurant isn’t going out of business because it’s losing money, it’s going out of business because it MIGHT lose money down the road.
    And McDonald’s never use the profits of one store to cover the losses of another store. Never! Don’t make me choke.
    Insurance is about risk management. Sometimes they win, sometimes they lose. If they are getting record profits, they seem to be winning their risk management problems.
    If Allstate is pulling out now, maybe they should never have been in that business to start with. Don’t cover anybody on either coast. That would cut out what, 50% or more of their customers?

  4. In fact, my examples are not flawed but are illustrations of when you might decide the risk is not worth it. Why do you say a company should take a risk that is not in its interests? Should that company be able to tell you to take a risk that is not in your interests? If the company is wrong, it will pay the price in the market, as someone else will reap the benefits of its foolishness. It also may be that another company may make money on these policies, and so would Allstate, but it is not worth the gamble. For example, you may have fun playing basketball, but you decide the aches and pains the next day aren’t worth it. Doesn’t mean that is true for your teammates.
    Also, I don’t know for sure, but I believe McDonald’s franchises are individually owned, and so the scenario you paint of McDonald’s covering corporate losses would not be entirely applicable, it at all. If a franchisee wasn’t making money, there is likely a provision for him to be cast out and someone else would get the franchise, or some other consequence would ensue. Your statement, however, suggests you think Allstate should lose money on some people because overall it is making enough money. Why? What if you were, say, a lawyer and you had a strategy of upgrading your clients, getting rid of those who don’t pay or won’t pay your going rate. Then what if Allstate criticized you for dropping Mr. Jones as your client and said you should keep Mr. Jones because overall you are making lots of dough. Wouldn’t you say, Jones isn’t worth the hassle to me, he should just go get another lawyer? I think you would. So why do you not apply the same standard to Allstate?

  5. OK, you don’t understand where I’m coming from.
    I’m perplexed at the best that you go on about McDonald’s, but then seem to not understand how franchises work. Most franchisees own more than one McDonald’s. But we’ll go on under your assumption.
    I wasn’t aware that individual offices of insurance companies have to cover their own losses.
    If a McDonald’s goes out of business, I may have to drive a few miles but I will find another McDonald’s that offers the same service, food, etc. It may be further out of my way, but at least I can find something equitable relatively close.
    Let’s extend your illustration even further. The restaurant is a family owned business. It offers dishes that can not be found anywhere else. Still, I have a choice. There are other restaurants around that I can choose to eat at, even McDonald’s.
    Now, let’s try to reconcile the above with what is actually going on in areas like Florida, Georgia, Louisiana, and New York. A McDonald’s isn’t making a profit, neither is a Burger King. Every McDonald’s and Burger King go out of business in the state, because they just don’t see any profits in staying in that state. Wendy’s decides not to take in any new customers because of what is happening to McDonald’s and Burger King. What-a-burger decides that the whole state is now not worthing serving and closes down even their stores that are making a profit, because now they are afraid that they will not make a profit in that state.
    And now, maybe if I’m lucky, the only option I have is to eat at is called State Burger. By law, they charge more than anybody else. So now I’m getting burger for a filet mignon price. The service is absolutely putrid. And I have to go way out of my way to get there.
    Eat at home instead? I can’t, I’m required by law and/or contract (those pesky mortgages you know) to eat at a restaurant.
    So yes, I can truly say that your illustrations are deeply flawed.
    “Your statement, however, suggests you think Allstate should lose money on some people because overall it is making enough money. Why?”
    *Because isn’t that the purpose of insurance?? To spread the risk around?*
    I really want to see the law or constitutional edicts that say that they must make a profit of everybody that they cover!
    I want to see that edict for any person, company or corporation.
    And go ahead and jump on the lawyers. Ever hear of pro bono? I believe that most lawyers are required to do some pro bono work to keep their license. I’m not a lawyer, so I don’t know for sure, but from looking at the google results, it sure looks like it.
    The issue is, if they can post record profits still covering some people that they are losing money on, it sounds like they have their risks covered.
    You’re saying that they have risks is true, that’s what insurance is about. All of a sudden the risks have become to high? If they are too high now, weren’t they too high 5 years ago? 20 years ago?

  6. David Rossmiller

    I understand where you are coming from, I just don’t agree with you. If you are in an area where every restaurant is losing money, is your solution to force them to sell food at losing prices? Say these restaurants are owned by large chains — will they keep those restaurants open? No, they won’t. Neither would you. They would either sell food at a price that brings a profit or, if that is not possible, they will close. I imagine once or twice you have made a loan to a friend or lent something of yours to a friend, and never got it back. Do you continue to lend to that person? If you say yes, I would like to ask you for a loan.
    Say you are a banker. You know a certain percentage of loans will not be repaid. Therefore you hold certain assumptions about the risk. By charging a given rate of interest, plus return on the bank’s investments, you calculate a rate of return. This allows you a profit, and to pay your obligations such as savings account interest. Say that you have made a number of construction loans and you are finding that these constitute 20 percent of your loan portfolio and there is evidence of a big increase in defaults on these types of loans. Should you continue to make these loans even though you are in the business of accepting risk and even though the board will remove you as president if you don’t pull back from making this type of loan? What if you determine that a portfolio holding 8 percent of these loans is the best mix for you, but future loans must be at 10 percent to cover your bank’s risk strategy. If the state says you must give loans to whoever wants one at 5 percent, you likely will just stop making construction loans entirely.
    In addition, pro bono work is entirely different from a stupid business model. Working on behalf of the indigent is a far different concept from putting up with clients who don’t pay promptly, ask for services for which they can’t pay, or who otherwise are more trouble than they are worth.

  7. I think the conclusion of this is that we agree to keep disagreeing.
    The talk about restaurants and lawyers is trying to push the model of how insurance works into a completely different model. It just doesn’t work. On any level. You’re trying to complain that restaurants don’t close down because they might not make money isn’t the case in real life. That IS obviously the case in the insurance industry.
    Your example about banks is a heck of a lot closer. But the fact of the matter is, I’m certainly not paying the same insurance rate as my buddy in Ohio is paying for an equivalent property. My escrow has grown $100/month each of the past years. My property taxes next year are going to actually hit $1,200/year, the payment on the house is still the same, my insurance has gone up $2,400/year. I should be getting the paperwork soon to see what the actual rate is I’m paying, but I know at this point it’s more than my buddy’s. And I don’t even live in a coastal county. This house is even covered by a pre-Andrew policy.
    People are upset because while the insurance company is talking one side out of its mouth that it can’t make any money on Joe Blow in coastal New York, the other side is talking about record profits. Is there any real way to reconcile the two different outlooks? Especially to the regular joe?
    You want your CPA to drive a Chevy, and you want your lawyer to drive a Ferrari.
    In this particular case of All State, it sounds like they want to be driving a Ferrari. Now it might some sense if another part of their mouth was talking about reducing rates to their existing customers because of the large profit. That might help.
    But when your CPA is driving a Ferrari, and you don’t have a choice in who your CPA is, do you really expect NOT to hear complaints?
    It used to be that management had to wear different hats, and take care of not just the shareholders, but the customers and employees as well. That’s gone to hell in a handbasket, it’s give the shareholders maximum value NOW, even if it costs them value in the long term by doing what is right with the customers and their employees.
    All State can’t take the risk. Just because they MIGHT lose money. Which is funny, because they might lose money regardless.
    State Farm a few years ago bought an car insurance company in New Jersey. They had to send out letters to their insurance holders to tell them their rates were going up because they didn’t realize the extra cost of stolen vehicles being exceptionally high in New Jersey. I understand this, although it makes me wonder if they actually did their due dillegence.
    The anger at insurance companies is particularly palpable in states like Florida. And more companies are pulling out. Another county south of me (I can’t find it darn it!) has found that another company is not renewing their customers. No warning, just a letter to their customers saying no more. The rest of the existing insurers aren’t taking in any new customers.
    What is the solution? I don’t see one. Floriday has tried both the carrot and the stick, and neither one did squat.