First, insurance is probably one of the most regulated industries in the United States

Insurance regulation requires that you actually earn the premium one day at a time. Many people are unaware of the fact that insurance premiums cannot immediately be counted as earnings by the company that collects them. The rest, and sometimes that's a small margin, is profit. The vast majority goes to paying claims and then for salaries, commissions and overhead. It's important to understand what is paid for out of every premium dollar the insurance industry collects. The big risk lies in accurately predicting what they'll decide next, because the courts continue to surprise us in a number of ways, even on cases involving seemingly straightforward decisions.

We know there is a significant amount of case history, which we follow. We also have to monitor the legal system. We engage in public policy debate because state legislatures make decisions that could fundamentally and dramatically increase the cost of insurance. Then there's legislative activity in any given state. To complicate matters even further, each state has its own premium tax laws. So, from a regulatory standpoint, anything can happen from "A" to "Z". Not only does each state have its own regulatory scheme, every state has its own regulators, which includes the personalities of fifty sets of people with their own focuses and biases on particular issues. And second, insurance is regulated independently in each of the fifty states, unlike banking, which has a federal regulator. Then we build a model to project what the future might be. At Farmers, we frequently reassess all these issues and try to decide how much weight to assign each.

It's a complex environment. That uncertainty also affects the cost of insurance. So, on an annual policy, we do not earn 100 percent of the premium on the first day, but 1/365 of it.