Insurance Is a Scam

You pay insurance every month for a decade. You never make a claim. You're a "good customer."

Then something happens. You make a claim. Suddenly you're treated like a fraud suspect.

Your file goes to an adjuster whose job performance is partly measured on how much money the company doesn't pay out. They request documents. They request more documents. They cite clauses you've never read in a contract you didn't write. They lowball the offer. They drag the process for months.

You either accept 40% of what you're owed, or you hire a lawyer and fight for two years.

That's insurance. That's the product.

The concept of insurance is ancient. The Code of Hammurabi, written around 1750 BC in Babylon, contains the first documented form of it. Merchants would take a loan to fund a sea voyage. If the ship sank or the cargo was stolen by pirates, the loan didn't have to be repaid. The interest covered the risk. This was called "bottomry," and it's the seed of every modern insurance contract.

Risk pooling itself is older than that. Chinese river traders, around 3000 BC, would split their cargo across multiple boats so that one shipwreck wouldn't ruin them. The Romans had burial societies where members paid small monthly dues into a pot that covered funeral costs when one of them died. Alpine farmers helped each other when livestock or children fell ill. All of it was insurance, in the original meaning of the word: a group of people pooling money so that no individual would be wiped out by an unlikely catastrophe.

The structure that runs the modern world started in a London coffeehouse in 1688. Edward Lloyd's coffee shop became a meeting point for merchants, ship owners, and investors. When someone needed insurance for a voyage, the cargo manifest was passed around. Investors who wanted a piece would sign their names underneath the document, agreeing to cover a percentage of the loss. That signature is where the word "underwriter" comes from. Lloyd's of London still exists. It's now a $50+ billion market.

The original idea was beautiful. The modern version is a very different animal.

Original insurance was mutual. The people paying in were also the people getting paid out. The pool existed to serve them. Any surplus went back into the pool or was returned to members.

Modern insurance is a publicly traded company with shareholders. The pool exists to generate profit. Every claim is a cost. Every premium is revenue. The math of the business is simple: collect as much as you can, pay out as little as you can, invest the difference.

This is called the "float," and it's the entire game. The insurance company holds your money for the years between when you pay your premium and when (if ever) they pay a claim. During those years, they invest your money. They keep the investment returns. You get nothing.

Warren Buffett, who is one of the richest people in the world with a net worth of around $152 billion, built his fortune almost entirely on insurance float. Berkshire Hathaway's insurance subsidiaries (GEICO, General Re, BH Reinsurance) generate roughly a quarter of Berkshire's total revenue and provide the cheap, long-duration capital that funded every other Berkshire investment for sixty years. Buffett figured out, before most people, that the actual insurance business doesn't have to be profitable as long as the float is large and stable. The insurance is the marketing. The investment income is the business.

Sound familiar? It's the same model as airlines and their frequent-flyer programs. The visible product is the bait. The financial mechanism behind it is the actual money-maker.

Here's the modern reality, in numbers from 2024.

US health insurance plans sold through the federal marketplace denied 19% of in-network claims. Out-of-network claims were denied at 37%. UnitedHealthcare and AvMed, the two worst offenders, hit denial rates of 33%.

Source: KFF (Kaiser Family Foundation) 2024 ACA Marketplace data; CMS reporting. One in five medical claims, on a plan you're already paying for, gets denied on the first pass. The worst insurers deny one in three.

The reasons are mostly opaque. The most common category for denial in 2024 was literally labeled "Other", meaning the insurer didn't specify a reason. The second most common was "administrative." A small fraction were denied for actual medical reasons.

Auto and property insurance work the same way. You pay your premium for years without issue. The day you have an accident, the company sends an adjuster whose job is to find every possible reason the claim shouldn't be paid in full. Pre-existing damage. Improper documentation. Policy language. Delay in reporting. They lowball. You fight. Most people give up.

And here's the obscene part: insurance companies know that 60 to 80% of denials, when appealed, get overturned. They deny first, knowing most people won't fight. The denial isn't a judgment about the claim. It's a filter. A way to keep money in the float by exhausting the customer.

The really wild part is that insurance companies are themselves insured. By other insurance companies.

It's called reinsurance, and the global market is worth around $500 billion a year, projected to hit $1 trillion by 2035. The top five reinsurers, Munich Re, Swiss Re, Hannover Re, Berkshire Hathaway Reinsurance, and SCOR, control about 40% of the market between them.

Each layer collects fees and holds float. When the bottom layer needs to make a claim, every contractual reason not to pay sits ready in the layers above.

And the reinsurers themselves use retrocession, they re-insure their own reinsurance. The risk gets diced and spread across institutions until no one really knows who's exposed to what. This isn't speculation. This is how the global insurance system is structured. Each layer collects fees. Each layer holds float. Each layer earns investment income on money that originated, somewhere at the bottom of the pyramid, with a customer paying a monthly premium.

When something goes truly catastrophic, a 2008-style financial crisis, a pandemic, a war, the bottom of the pyramid pays. Customers can't get claims paid because the primary insurer says it's a force majeure. The primary insurer turns to the reinsurer, who turns to the retro-reinsurer, who turns to the capital markets. Everyone has a contractual reason not to pay. The losses get pushed back down to the customer, the taxpayer, or both.

Look at what happened with cyber insurance during the major ransomware waves of the early 2020s. Companies that paid for years of cyber coverage discovered, when actually attacked, that their policies excluded "acts of war," which insurers then defined to include state-sponsored hacking groups. Coverage that customers thought they had, denied. The premiums had already been collected and invested. The losses got dumped back on the victims.

The scam works because in most of the developed world, insurance is mandatory.

You can't legally drive a car in any developed country without auto insurance. You can't get a mortgage without home insurance. You can't operate a business without liability insurance. In the US, until 2019, you literally couldn't exist without health insurance, the individual mandate penalized you for not buying it.

This is a hostage market. You don't get to opt out. You don't get to negotiate. You take what's offered, you pay what's asked, and you hope you never actually have to use it. Because the moment you try to use it, the company you've been paying for years transforms from a friendly brand into a legal adversary.

And the regulators? Most insurance regulation is done at the state level in the US and the national level in Europe, by regulators heavily influenced by the industry they oversee. The revolving door between insurance executives and insurance commissioners is well-documented. The result is decades of regulatory capture, with consumer protections that look strong on paper and fail in practice.

Insurance, in its original form, was a beautiful idea. A group of people pool small amounts of money so that when one of them faces a catastrophe, the group covers it. Risk shared, individuals protected.

This still exists, in pockets. Mutual insurance companies (companies owned by their policyholders, not shareholders) operate on the original model. Cooperative insurance, common in parts of Europe, returns surplus to members. Some peer-to-peer insurance startups have tried to rebuild the model from scratch, with mixed results.

But the dominant model, publicly traded insurance corporations with quarterly earnings targets and shareholders who want returns, has structural incentives that point in exactly the wrong direction. Their job is not to pay claims. Their job is to maximize the float, deny what they can, and return profit to shareholders.

The original insurance was a community protecting each other. The modern version is a financial institution using your premiums as raw material for capital markets, occasionally interrupted by the inconvenience of having to actually pay out a claim.

You don't have insurance. You have a subscription to a denial machine.

When you finally try to use the product you've been paying for, you discover the company has spent the last decade quietly preparing legal and procedural defenses against you. The premium was the easy part. The claim is the war.

Warren Buffett figured out that this entire industry isn't really about protecting people. It's about collecting capital from millions of small payers, deploying it at scale in financial markets, and counting on enough customers giving up before they get paid out.

Insurance is mandatory. Insurance is profitable. Insurance is a four-thousand-year-old concept that got corrupted somewhere between Hammurabi and the IPO.

You can't escape it. You can only understand what it actually is. A financial product, sold as protection, owned by people who win when you lose.