An Expanding Line of Business
I enjoyed Michael Walters In My Opinion column on individual health insurance. Succinct, with many interesting ideas! On his comment “individual health policies will not have the catastrophe or tort system problems that homeowners and auto insurers have,” there are innovative treatments that are very expensive at first; there are possible mass tort claims; and there is innovative gene research that has the possibility to diagnose medical conditions before they occur. There is a cost of developing new treatments, which may be vitally important but affect only a handful of people. I am grateful he wrote this article, and I hope the CAS will take up the challenge of setting up a task force!
Arthur Schwartz , FCAS
The Insurance New Business Paradox
I recently reviewed the Back of the Envelope article (AR, November-December 2023), and much like the author’s account of first hearing of this “new business paradox,” I too found it to be “borderline outlandish.” However, I did not come to the same conclusion as the author upon reviewing the calculations provided in the article. In particular, the calculations assume that there are no additional fixed expenses associated with writing new business policies. Fixed expenses are typically associated with things like employee salaries, office buildings and maintenance on those buildings, technology costs, and some portion of policy acquisition costs like TV advertising. By allocating $0 fixed expenses to new business, the article implies that the insurer could grow substantially (in fact, it would be infinitely scalable) without having to hire any additional employees to service those policies, buildings to host those additional employees, or having to spend any advertising money to attract those new policies in the first place. While there may be some rare and unique cases where this assumption would hold, in most cases it would not be true, and this would invalidate the examples provided in the article.
Josh Taub, FCAS
Director of CAS Exams
Instructor for CAS Exams 5 & 8
Author Rob Kahn, FCAS, responds:
Thanks for the feedback! You are absolutely correct that an insurer cannot grow infinitely without incurring additional fixed expenses. However, an insurer could certainly grow modestly, and any additional fixed expenses incurred would, in most cases, not invalidate any of the arguments. In the examples provided, the new business was less than 10% of the total book. Growing a book of business by ~10% will probably not necessitate additional headcount, but to your point — it might. As with anything, it will depend on a myriad of factors. As you correctly point out, the very existence of additional new business may increase fixed expenses. With that in mind, it would be more precise to state that: “New business adds value when the new business premium covers the cost of all loss and expenses specifically attributable to the new business, so it can then pitch in and help shoulder the burden of the larger fixed expense pool.” (Or something to that effect.) Thanks for keeping me honest.
