> The less an insurance company pays for healthcare, the lower the premiums or can offer and win more business.

I cover this in the second half of that sentence.

This would be true if there were a reasonable amount of market understanding by customers and the friction to switching were low. Neither are the case. Most of the time, it takes a qualifying life event or open enrollment (once a year) to switch. And then, understanding the trade offs between plans, which are difficult to understand on a good day, is another barrier.

Then why are insurance company profit margins so low? Why wouldn’t they just jack up premiums irrelevant to their competitors and ignore negotiating pricing and see increasing margins?

Low profit margins/multiple sellers indicates a highly competitive field, which means the businesses must be doing something stay in business.

Yeah, but "something" could be advertising, kickbacks, cherry picking, lemon dropping, making comparison difficult, selectively optimizing visible metrics while balancing with dirtbag fine print, etc etc.

Competition != Productive Competition

Then the competition who does not do that crap would offer lower premiums and steal business. Just like any other business that wasted money cannot compete with a business that does not waste money.

And this is only true in a markets that are easy to enter. Starting an insurance company isn’t easy.

Why are profit margins only 5%? Could be many reasons, including collusion. Insurance companies have teams of lawyers whose job it is to navigate existing regulation, lobby for new ones and to push for ones that hurt competition.

Given how shady and complex the entire industry is, we don’t really have a reason to believe that 5% is an accurate number.