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.
Final Thoughts
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.
Interesting take on insurance companies…hah =).
There is, however, insurance where you can recapture the cost of premiums paid: whole life insurance. You can use the benefits of this insurance when you aren’t in the position where a claim needs to be paid (when you are alive).
Other insurance products benefit you only when something bad happens…
I think a huge difference is that the insurance company still has an underlying asset. Maybe it is a building or maybe it is a note/bond, but they have something. I think most ponzi schemes don’t have any underlying assets.
Cool way of thinking though…I sometimes get jumbled up with value inevesting…think about it you buy a stock that you hope someone else will believe is worth more money…
Insurance is its own thing, closer to a casino than a Ponzi. The bet is not on the roll of dice but the chance events in the real world. And just like a casino with only one gambler in which one big win followed by a walk-away from the table will wipe it out, insurance companies rely on the statistical power of large numbers of insured people to essentially guarantee their return on investment. Joe Doakes might collect a big insurance payout, but he is offset by a million premium payers.
But unlike a casino, insurance–particularly medical or life insurance–is the only time when you hope you don’t get a return on your investment! This is because you are hedging, with money, against a life outcome you really don’t want.
Even though insurance doesn’t qualify for the definition of a ponzi scheme. It is still a scheme.
I am having so much trouble with a home insurance company called Germania. I have been with these people for 12 years. Now that I’m disabled and needed a new roof. These people refused to help me. They drag their feet and I got tired of waiting on them. My roof was getting worst by the day. Several sheets of plywood decking had to be replaced. It cost me almost $10 grand through Lowes. I had to max out my card to pay for my roof. All I’ve received after a 11/2 years is only $3 grand. Stay away from this company! They are NOT accredited by the BBB. I was told not a member of the state insurance board. To me they are a big rip off. I’m filing a complaint with the BBB and attorney’s general’s office. They need to be shutdown!!
@fran
Why is the insurance company supposed to fix wear and tear of your roof? Do you put in a claim when you need new tires too?
You say they are NOT really Ponzi Schemes? Hmmm….let’s see, in Vegas the house stacks the odds in its favor so that the players can’t win. Same as insurance companies. In Vegas the house takes your money and you get nothing in return generally other than the feeling you were had. Same as insurance companies. In Vegas you at least feel important and are treated well for a very short period of time as long as you pay. If you take money from the house with any sort of regularity you are NOT welcome. Same as insurance companies. In Vegas you are openly gambling. Same as insurance companies. In Vegas you have a chance (be it ever so small) of coming out a winner. Not so with insurance companies. You get nothing for years of payments. You tell me if this is a ponzi or not. I would argue that the whole f-ing financial industry serves only itself. This includes insurance companies. Invest your own money or put it away. Don’t give it to these jokers.
Nice piece ..though in reference to “they would still have their current insured to collect premiums from.”
This sounds like it is assuming that the “current insured” will either 1. live, drive and pay in forever or 2. all get out at the same time.
Neither is the case, and if there were no “new investors” but constantly people dying, becoming too old to drive, etc., therefore a decreasing base of “current insured” then eventually you would reach a critical point where the premiums paid weren’t able to sustain the payouts.
You were right to think it was a Ponzi.
B
As a former agent, I can tell anyone why I left the business. Because being a professional liar is boring and stressful. Nothing an insurance company will tell you is true. They use the 3 ‘d’s’; deny distract, delay, especially if your premiums have been paid faithfully and on time. They profit from impressions. They allude to actions they will not follow up on. What are you going to do about it when you’re dead. On a life insurance policy, insist the beneficiary gets a one-time pay out. Typically, the insurance company will tell the family that the death benefit is being held in ‘their bank’ and are going to write a check each month for some smart petty amount, They will do this for awhile, until they stop sending the monthly check to see if you’ll notice. Then they will claim they don’t have a policy or that there was something ‘wrong’ with the original contract and should not been allowed; next if that is proven to be BS, then they’ll lose the paperwork, mysteriously. If you’re not distracted by then, then they will just wait until you get tired of asking. Check it out, that’s how they make a profit
Insurance is a part of the capitalist finance system. It is a way to further impoverish the people. It is NOT socialism! Obamacare was underwritten by private insurance corporations to force us to by private insurance. Whether it’s “private insurance” or medicare and medicaid, all money comes off the back of working people and goes to the medical device monopoly, phamraceutical monopoly and insurance monopoly investors. I am so sick of people who are calling this “sociaism”
Insurance is closer to a pyramid scheme than a Ponzi scheme. Agents sell policies and receive a commission. They also recruit new agents and receive a commission in the new agent’s policy sales, then new agents recruit more new agents and there is a portion of their sales going on up the chain. The difference between insurance and a pyramid scheme is there are laws mandating people have to have insurance when they drive a vehicle or take out a mortgage on a home purchase.
Insurance is part the inflation ponzi scheme….
Of course, it is a form of Ponzi scheme, fuzzy B.S.. Just another cut out of your PAYCHECK PIE. Using kick backs, aka, donations, it is now mandatory LAW.