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.