A few hundred years ago, when insurance was “invented” in Edward Lloyd’s coffee house (now known as Lloyd’s of London), ship owners sat over coffee and decided how they would share risk. Essentially, a mini-insurance company was formed for every voyage. Imagine if a ship owner or its captain were of questionable character. His peers would take very little risk to cover that owner’s ships. If his reputation was solid, however, everyone would jump on board to share the risk.
Of course, in those days, everyone in the coffee house knew the owner, the captain, and the risk they were taking. This is extremely different from the anonymity of buying insurance today. Today, middle market companies are mixed together in an anonymous pool with other, and in many cases, unsafe companies. Even their competitors can be included in their risk pool. There is another option, Performance Based Insurance guarantees participating companies know who is in their risk pool, and can and will be rewarded for unused claim premiums. Isn’t that a better alternative than using hard earned premiums to subsidize other companies?