It's not getting your premium back because you didn't need it. You'd still get back this portion of the premium even if you get into a car accident on your way to the grocery store, because it's not about you, it's about everybody else. The average risk went down, so the average premium went down.
This certainly happens in the other direction too, they'll raise your premium for the next period if the average risk goes up. But their marketing departments aren't stupid. Sending everybody a check right now makes their "largess" more conspicuous to customers than sending everybody a smaller bill next quarter. It also keeps you from canceling your policy with them and switching to someone else currently offering a lower rate because of the currently lower risk.
"Allstate did me a solid when they didn't have to" is a pretty good PR move, especially if they're suddenly awash in cash due to reduced claims.
Even for a for-profit insurer, insurance is a fairly competitive market. They might have to give the customers the money anyway to keep them from defecting to the mutual insurance companies. Even if they didn't, that would make being in the insurance market more profitable, which would attract new competitors, which would drive down premiums/margins until the risk-adjusted return of becoming an insurance carrier was back where it was. In other words, in a competitive market the customer gets the money one way or another.
This is a common occurrence with regulation. The regulation requires some good thing that would have happened regardless, the good thing happens and the proponents credit the regulation even though it was inevitable. Meanwhile you have a compliance cost, because it takes resources to keep track of the regulation and make sure you're complying with it even if it was the exact thing you were going to do anyway. That makes everyone poorer -- the compliance cost is the opposite of the windfall, so it makes it less attractive to compete in the insurance market and allows companies to pass on the compliance costs as higher premiums.
1. If there is extra profit one year, these companies will willingly reduce premiums instead of giving bonuses, stock buy backs, or dividends to investors. I don’t know if you have observed the stock market recently
2. “Compliance cost” - these things are not done via paper and fax machines. Regulation simply asks one to keep track of, say in the case of medical companies, administration cost vs servicing cost etc - things you would have had to do anyways in your public-good-seeking scenario above
It's the thing competitive markets require of them. If costs go down, one company is going to notice how much more profit they can make by lowering prices and using the lower prices to triple their market share. The others then have to do the same thing or they continue to lose market share.
The buybacks are something else entirely -- they're a result of low long-term interest rates. Companies have at least two ways of raising capital. They can sell stock and they can borrow money. When interest rates are low it makes more sense to raise money through borrowing than selling shares. Buybacks are the reverse of selling shares, so when interest rates are reduced there is a rebalancing which involves companies borrowing more money and buying back shares because it's cheaper to use borrowed capital than invested capital when interest rates are low.
> 2. “Compliance cost” - these things are not done via paper and fax machines. Regulation simply asks one to keep track of, say in the case of medical companies, administration cost vs servicing cost etc - things you would have had to do anyways in your public-good-seeking scenario above
Have you seen the regulations in some of these industries? There is nothing simple about it. It requires you to have lawyers in addition to accountants. And the lawyers are pathologically risk-averse but have plenary control over compliance policy because no one wants to end up in court, so the rules in practice are characteristically much more rigid than what the legislature intended.
Many of the costs are also fixed rather than proportional to customer volume, which disproportionately impacts smaller companies and results in a disproportionately large negative impact on competition.
I mean, something that comes to mind in terms of current events, people selling puts (stock options) just before the stuff hit the fan with COVID-19, were selling insurance. It seems really difficult in my mind to argue that that insurance was priced correctly just before the panic started.
The question doesn't make sense. The price is neither correct nor incorrect, it is just the price. It may or may not lead to financial success based on a whole host of factors but that isn't the same thing as "correct" or "incorrect".
Otherwise doesn't a refund go against the whole idea of insurance? The idea is you pay a premium not knowing if you'll need it or not, and they take on all the risk if you do need it.
If you ask for your premium back because you didn't need it you're missing the point of insurance.