Energy is never lost, says physics; it is only transformed. If you look closely, you’ll see that this simple formula aptly describes what happens every day at every insurance company: Premiums become stored energy, and claims become its release. And in between, there’s a lot of friction.
A premium is more than just a payment. In physical terms, it is tied-up capital, tied-up time, and tied-up trust. If a loss occurs, this energy is released and converted into a benefit. The First Law of Thermodynamics notes that nothing actually disappears in the process; only the form changes. In the insurance industry, however, it’s clear that some of this energy seeps away on the path from the claim to the payout. It’s lost to friction: administrative detours, forms, and endless email exchanges. It is lost as heat: legal fees, expert opinions, delays. And it is lost due to simply inefficient systems that unnecessarily drag out straightforward cases. Like any machine, the insurance industry consumes fuel just to keep itself running.
The mess grows on its own
The Second Law of Thermodynamics reveals the more uncomfortable truth: entropy increases, and systems naturally tend toward disorder. Anyone who has ever tracked a claims file for months knows the pattern. Over time, a neatly organized file turns into a hodgepodge of forms, emails, and conflicting reports. A carefully structured underwriting portfolio descends into confusion as soon as risks change, coverage is adjusted, and no one keeps the records up to date anymore. Legacy systems accumulate patch after patch until, in the end, there’s more chaos than code left. This disorder isn’t a sign of negligence; it’s a fundamental physical principle—and that’s precisely why insurers constantly invest in automation, training, audits, and compliance. Not because order arises on its own, but because it must be maintained through effort.
The claims department as the driving force
You can think of a claims department as a heat engine. Claims arrive as “heat”; the department processes them and ultimately produces “output.” No machine operates at 100 percent efficiency. Some cases drag on for months; others end in dissatisfaction; still others result in disputes, lawsuits, or reputational damage. The ultimate goal is to maximize usable output while minimizing losses as much as possible. If the system threatens to overheat—for example, due to cumulative losses or a series of liability claims—reinsurers take on the role of a cooling system. They absorb the excess heat and allow the primary insurer to remain stable. But cooling comes at a price. And if it fails, the system overheats.
No system operates in a vacuum
Thermodynamics reminds us that nothing works in a vacuum. Every process consumes energy; every process loses some of it along the way; and without continuous effort, order turns into chaos. For the insurance industry, this is not a metaphor to dwell on, but a sober description of its day-to-day reality. Anyone who believes that a system that was once good will remain good on its own has failed to understand the second law of physics and will be proven wrong by their own case files.
Binci Heeb
Paul the Insurer has additional content that might interest you, such as a series of interviews with insurance industry executives.
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