Correction and Insurance

We all know that in this recession most of the large insurance companies had to be bailed out by government. I am trying to find reasons of they going so bad and government who is acting so strict with other industries being nice to insurance companies....

Why do we all buy insurance? To safeguard ourselves from the risks. If I die tomorrow, i want my kids to be taken care of. If I have an accident, I want to be taken care of. If I loose my house in storm, I want money buy a new one and so on and so forth...

How do insurance companies make money? Since all the people buying insurance do not have tragedies at the same time, Insurance company can pay off the people in problem by money taken from others. They of course do need to make profits to pay salaries of the agents and managers...

Now, the premium is calculated based on perceived risks. Risks are based on Past information and data. Now before this correction, we did not have any information or data to calculate premiums effectively for all the insurances that these companies had provided.

Secondly, all these insurance companies were insuring banks and other businesses for unnecessary risks that they were taking. In a booming market, more the risks you take more the rewards. And all your risks are hedged by paying small premium to insurance companies and when you are faced with negative consequences, you go back to Insurance companies.

Thirdly, and more importantly, Insurance companies pay agents based on number of policies sold. So more the risk agents makes you take, more money you pay them and in a booming economy where quarterly results are of utmost importance, you end up taking more and more risks at premiums which may not be justified. And still you take risks just to please your investors...

Now, with the snowball effect in real estate which entered other markets swiftly, insurance companies were forced to pay too much which made them unsustainable. And if the government would not have bailed these insurance companies, there would have been catastrophic disaster in financial sector...

Everyone who would have taken risks on insurance would have immediately sold of everything to reduce the risks and whole economy would have been shattered...

Even those with health insurance would have been denied basic healthcare and by law of land, basic health is responsibility of the government and then, the treasury would not have been able to meet even most basic healthcare requirements...