The Law of Large Numbers
Contributor
(866) 735-1102 Ext 710
The "law of large numbers" is the theory upon which all insurance exists. Essentially, it says that if you can put enough "risks" together, then the majority can pay the claims of the minority. It relies on the idea that, in any large group, it will be the minority who suffer some sort of loss and submit an insurance claim. The larger the group, the more likely that premiums paid by the policyholders will cover losses and provide the insurance company with a profit. So, it goes, that if you limit the possible numbers in the group, you may suffer adverse loss experience.
If I provide insurance to Kate Winslett's legs, for example, and promise to pay for certain, stated injury to her legs; my group from whom I receive premiums is limited to one. This is the oppositie of the law of large numbers; in that I have no group over which I can spread my potential losses.
This theory becomes important in Florida policyholders' current problems with insurance and what has been dubbed the "insurance crisis". We seem to have experienced many insurance crisis in the recent past; just recently we punished injured victims in exchange for supposedly helping doctors with malpractice premiums. So, now the insurance industry has created a new insurance crisis.
Florida is not the first or last state in which the insurance industry gets a bad taste for paying lots of claims and decides it has had enough. It has happened repeatedly over the years and as long as states allow it to happen, it will continue. Many states have found solutions to these crisis that do not involve punishing the average citizen; as prior answers our legislature has come up with have punished average Floridians.
If we approach the problem from the perspective that it is not new and that other states have dealt with it; then it is not really rocket science. It is not likely to really be the huge campaign issue that Charlie Crist made it out to be. For example, in the late 60's, urban America was plagued with rioting and crime in its inner cities areas. Insurance companies were sprinting away from insuring the areas; using a technique called "redlining". In answer to this, FAIR Plans were opened in various states (Fair Access to Insurance Requirements) and these entities provided insurance coverage in the areas that insurance companies refused. These associations were formed through legislation requiring every insurance company writing property insurance in the state, to participate in the losses and profits of the association. In this way (remember the law of large numbers) no single insurance company would have to shoulder any large losses on their own. Rather, ALL the companies share in the losses.
One big step in the correct direction, would be to prohibit the State Farms and Allstates in the state from forming a "Florida" company, to artificially appear to be losing more money than they really are. Currently, state law permits large conglomerate insurance companies to create a "Florida company" and book their losses and profits through that company. The result is that when a catastrophe occurs, it appears as though the companies are getting hurt worse than they would appear to be if measured against the assets of the larger, "parent" company (once again, think "law of large numbers"). This allows these "Florida companies" to publicize the horrible losses they suffer when, for example, a hurricane visits our state.
So, the message to Florida legislators? If you really want to solve the problem, you can. There are other approaches that have been successfully used. Similarly, if you really do not want to solve the problem, you will not. My advice is to ignore the insurance lobby that helped you get elected and concentrate on the average citizens who imagine they elected you.