Posted On: June 9, 2009, 4:41 pm CDT

Posted By: ...and one more thing!

Insurance is the only industry where prices are set BEFORE they know what their costs will be. If I make widgets, I know what they cost to manufacture, so I set a price with a profit margin in place. If I run an insurance company I use statistical and actuarial data from prior years and other industry figures and try to guess what my costs will be. Price too high and I lose customers. Price too low and I don't turn a profit.

Just in case you're slow to catch on, that means it's really hard to be accurate. You'll hear about insurance company profits. Did you know that the Property insurance market turned in a 118 combined for the first quarter? For those of you not in the industry, that means that for every dollar insurance companies spent, they lost another 18 cents. For those of you who aren't business savvy that means they lost a ton of money in this market. Most companies shoot for a combined ratio of about 92% for property, which means for every dollar they spend, they make a profit of 8 cents. If you're bad at math, that's 8%.

Go shop at Bloomingdales - what do you think the markup on their product is? Do you really think that little cotton t-shirt cost $35 to make? How about a pair of cotton underpants at Victoria's Secret? Do you think there's something special about them that it cost $12 to make them? How about buying a soda at a restaurant. It costs the restaurant under 5 cents per glass of soda, but they charge you $1.97. Talk about a profit margin!

Insurance companies actually have one of the lowest profit margins in major industry. But they're evil! They want to make a *gasp* profit! Insurance companies are for-profit companies. And that's a good thing. You can buy insurance from one of thoes start-up companies. But when no one is around to write you a check when your house burns down, or blows over, or gets robbed, don't be surprised.