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Insurance – Mutual Aid Or Gambling

Update: Here’s an example of the truth that half of personal bankruptcies are caused by medical bills, and of that half, three-quarters of the people have insurance. A single mother with health insurance driven into bankruptcy by the bills for cancer treatment.

In a post about Nancy Pelosi coming to Mississippi, Ana Maria noted that in the House: “A subcommittee of and the full Finance Committee have passed the bill that would expand the federal flood insurance program to include wind.”

I’ve been meaning to get back to the insurance industry and this is a good point of entry.

One of the things that early guilds and service organizations provided was a form of social insurance. If you were a member in good standing and fell on hard times, the group offered support. Many of these groups have continued this tradition. This was an extension of family support where one generation supported the next.

The same concept of coming together for mutual support was behind many of the original insurance companies. The premiums were used to pay the losses of members and the funds not needed were invested, often eliminating the need for further premiums. You still see the word “mutual” as part of the name of many of these early companies.

In business another form of insurance arose, essentially gambling. Lloyd’s of London is an example of a group that still follows that line. People bet their savings that some event is not going to take place and put a price on it. This started with ships’ cargos. Essentially the shipper bet the premium that the cargo would be lost, and the “players” at Lloyd’s gave him odds that equaled the value of the cargo that it wouldn’t. It is lot like a sport’s bar, except it started as a coffee house.

Now we move forward to corporations in the insurance business. The whole purpose of a corporation is to reduce risk, so corporations aren’t really a good fit for the insurance industry which is gambling on risk, until the industry changed. The industry now spends a major portion of its time reducing risk. Initially, and to some extent this continues, reducing risk generally, but in some industries to only reducing risk for the corporation.

Some good work has been done in workplace and highway safety by insurance industry groups, and there have been major advances that benefit everyone. However, the insurance industry has also decreased their risk by refusing insurance to large groups of people. In some cases it’s almost a given that if you can get the insurance, you probably don’t need it.

What a lot of people figured out about health insurance, they have learned also applies to homeowners’ insurance – the corporations have specific policies and procedures in place to deny coverage.

Now insurance companies are actually market investors. People think there is a connection between claims and the premiums they pay, but that is only partially true. The big rise in the premiums for malpractice insurance tracks more closely to the performance of the stock market, than the number of claims. The whole tort reform movement is based on marsh gas – the corporations lost money in the stock market, not in a courtroom.

The big insurance companies made record profits in 2004 and 2005, yet they are all claiming that they have to jack up rates to cover their losses. The losses were to their profit margin. They made record profits that would have been even higher without the 2004 and 2005 hurricanes.

I’m a capitalist. I believe in the free market. There is no free market in insurance. The states require you to have auto insurance. The banks require homeowners insurance to get a building loan or mortgage. The health care system will bankrupt you with insurance, and a whole lot faster without it.

The insurance industry doesn’t want to sell insurance to people who are a risk. They force states to form assigned risk pools for auto insurance; the Federal government had to start the flood insurance program; the state of Florida has had to create a homeowners insurance program; you can’t get health insurance if you have an existing illness.

It’s not that I’m a fan of government programs, but private enterprise is refusing to serve the market.

The best insurance coverage is to cover everyone. That spreads the risk out and reduces the cost to everyone. At present the insurance companies waste a lot of money deciding who not to cover and how not to pay out. You want to talk about tort reform, how about insurance companies who force you to take them to court before they’ll pay for the losses covered by their policies.

What we are left with is corporations who really don’t want to be in the insurance business, and a need for insurance that people can afford. The only reasonable option for the people who need insurance is to form their own company to provide it, and that’s what is happening. In case some have forgotten, the Constitution starts with the words “We the people”.

Including wind coverage in the Federal flood insurance program is a good start. Next up must be Federal health insurance. If the corporations want to continue to pretend they are in the insurance business, who cares.


1 hipparchia { 08.14.07 at 9:15 pm }

mutual of omaha’s wild kingdom. how prescient.

2006 fortune 1000 insurance industry profits, as percent of revenues*
life and health, mutual [12 companies] ~ 5%
life and health, stock [17 companies] ~ 10%
property and casualty, mutual [5 companies] ~ 11%
property and casualty, stock [33 companies] ~ 13%

looks like demutualization pays, provided you’re a stockholder. policyholders, ymmv.

2 Steve Bates { 08.14.07 at 10:09 pm }

NOTE: Tues 10:10pm CT, Bryan emailed me about a half hour ago that his connection is almost down. He’s running at about 1200 bps, which renders blogging impossible. He’ll be back when they fix the connection.

3 hipparchia { 08.14.07 at 10:35 pm }

i wonder if they sell insurance for that

4 andante { 08.15.07 at 11:07 am }

If they don’t sell it yet, they’ll figure out a way. And make it a federal law to have it.

5 Bryan { 08.15.07 at 12:09 pm }

I’m back zipping along at about 28.8K. Any time I expect to have the full ability of dial-up at the price of DSL.

That is what the meeting between Nixon and Kaiser-Permanente was all about – dumping the concept of “mutual.” Many of those listed as “mutual” aren’t really. They are tied to stock companies through creative fictions. Blue Cross-Blue Shield has a lot of these “arrangements.”

There is “business interruption” insurance that covers it, according to the policy, but good luck on getting a claim paid. If having all of your office computers and digital records stolen doesn’t qualify as a “business interruption,” I don’t know what does.

6 Steve Bates { 08.15.07 at 1:20 pm }

At least Blue Cross – Blue Shield has an appropriate acronym.

The great (if rather strange) early 20th-century American composer Charles Ives formed and ran an insurance company. Wikipedia doesn’t talk much about it, but IIRC from earlier reading, Ives was rather proud of the fact, because in those early days, insurance was a progressive innovation. There’s no reason that it couldn’t be, done properly; i.e., done from the notion of shared risk rather than immoderate profits. But it seems we’re going the other direction. Is anybody surprised?

As you note, Bryan, insurance and for-profit private enterprise are a bad fit. I’m all in favor of private enterprise when it improves the lot of our society’s citizens, and there are plenty of cases where it does. But this is emphatically not one of them.

Welcome back to the “tubes,” Bryan. What did you in? The last time I was brought down for a day, it was a backhoe a block away… that workhorse of 20th-century construction can certainly be the bane of 21st-century connectivity. With apologies to Tobias Hume…

The backhoe, the backhoe,
Sing… sweetly for the backhoe!

(The 17th-century original is, of course, “tobacco.”)

7 Bryan { 08.15.07 at 1:46 pm }

This was a regional outage affecting everyone in two counties, so it must have been something in a switching center on the I-10 corridor. They have too much fiber in the ground, but have never gotten around to connecting the telephone system into it. Rather strange since fiber was the big selling point for Sprint/Embarq for years.

I’m not back at DSL speeds, but I can at least see some of what’s going on. No multi-media, which I don’t care about, but it makes trying to connect to news sites a pain.