[Grovenet] Answer on 42.

[Ron D'Eau Claire]

David wrote:

I am unconvinced that the target marketing, and target selection  
really has anything to do with driving risk.  And I thought that  
insurance companies set rates in collusion with the state insurance  
commission to ensure that the company receives a sufficient return on  
their premium.  The best way to maximize profit margin would be to  
convince the insurance commission that the pool represents a bigger  
risk than it actually is, so that higher rates are allowed to cover  
the non-existent risk.  And, those people with good credit might be  
convinced to purchase additional insurance items, and investments.

Am I being too cynical?  Possibly.  But, then I once worked in a  
credit card operation of a major banking organization.  A company  
vice-president came through to give a pep talk.  He said that in the  
previous year the company had set aside some percentage of their  
budget to cover defaults on bankrupt credit card holders.  He said  
that the amount the company had actually paid out was significantly  
less than what they had set aside.  He was not happy with this  
situation!  If they had not reached their target percentage of  
bankruptcies, that mean that they had left too much of those people  
who were poor credit risks without credit cards.  He wanted the  
operation to push the credit cards harder to the poor credit risks.   
There was money to be made between the time the cards were issued and  
the people went broke, and he wanted the bank to get as much as  
possible.

Possibly auto insurance is the same way.

------------------------------------

Should we require convincing that "...the target marketing, and target
selection  
really has anything to do with driving risk."??

Or even that we require the risk to determine the customer base? 

I don't think so. 

The insurance companies come forward with an idea - a product - called
insurance. People buy it or they don't. The company survives or it doesn't
based on what people decide. 

Oh, wait! Of course. We already meddled in the free market. We mandated that
people buy insurance in order to drive! 

We've now undermined the whole free market idea. The insurance companies
don't have to compete on an open market: they cannot under our rules. We've
driven a captive market to them, including a great number of people who'd
never normally be interested in their product. Every automobile driver who
obeys the law must buy minimal insurance. The insurance companies no longer
define what they will sell or who they will sell it to. We, the general
public, do that. We've turned the insurance companies into mere managers of
the policies we now require, but the companies have no guarantee of getting
paid. They have to squirm and plan for ways to keep the cash flow positive
so they'll stay in business.

And that's what they're doing. 

The insurance business is exactly what we've forced it to become. Perhaps we
should have taken the bad drivers off of the road instead of trying to
mandate insurance. After all, I'm still paying a hefty premium for
protection "uninsured drivers". I'd an idiot to assume that someone who
crashes into me actually has insurance. It was our choice to 

You're assuming a motive behind the credit card company that simply doesn't
wash. Taking a "snapshot" of one corner of that process, such as the desire
to keep a specific target ratio in line with their expectations, leaves out
most of what is really going on. 

No one made money making bad loans. However, the percentage of bad loans can
be an indication about whether all interested borrowers who are reasonable
risks are getting an equal opportunity to be good customers. The lending
industry knows very accurately what the rate of bad loans is at all times
across the market. By comparing those industry ratios to their experience
with their current customer base, they know whether they are addressing all
market segments properly. While doing that, they're constantly trying to
figure out ways to encourage people to pay up and stay current. The more
successful they are at that, the larger demographic they can address -
perhaps more  than other lenders. If so, they win more successful business
and are more successful overall. 

In this situation they do lose some money on the bad loans, but they more
than make up for it with good loans they'd not have made had they ignored
that market.

Ron D'Eau Claire