Sunday, June 21, 2009

Thoughts on insurance

I'm not that old, but I can tell you a story about how things used to be in the good old days.

Back in the day, here's how insurance would work.

An insurance company would expect to take in a lot of money - just to have a solid figure, let's say a billion dollars over the course of 20 years. And it would expect to pay out a billion dollars over the course of 20 years. And it would pay out its administrative expenses and such simply from the investment income from that billion dollars over those 20 years.

It's supposed to be a pretty dull business. You make careful, prudent investments to make absolutely sure that you have the money you need to pay out claims. You spend hours pouring over actuarial tables and calculating premiums to make sure that you offer good value for the customer's insurance dollar, while still covering the possibility of a large claim coming in.

But sometime a while back, folks decided that greed is good and free enterprise can do anything better than a bunch of boring accountants and actuaries trying to provide a valuable public service. Let's run insurance like a for-profit business, and the magic of the free market will make everything better!

And, since greed is good, it's good to try to keep every dollar in premium payments you can for as long as you can. It's good to find ways to cut the costs of claims (even if this means denying a claim for an excessive period of time). It becomes a great idea to find a reason to, say, drop an expensive patient-to-be from your health insurance rolls, if you can do so legally. Remember, you're not trying to provide a valuable public service, you're trying to maximize shareholder return!

Of course, if a small group of extremely wealthy investors wanted to run an insurance company along more traditional lines, they could. It would have to be a small group of very wealthy investors, though... if such a company was publicly traded, it would likely be the target of a buyout. You see, since it wasn't maximizing its profit, its stock value would be low; other companies would realize they could make more money from that customer base. They'd buy out the company (and thus, the insurance contracts), probably using a leveraged buyout - the kind of risky investment old-time insurance companies would consider imprudent - and bye-bye traditional company.

Right now, Congress is considering health care reform. One of the possibilities on the table is a "public option", which is to say, medicaid for anyone willing to pay for it. Let the government run a health care plan; it won't be for-profit, and it won't try to be flashy. It'll just try to balance out premiums paid with benefits paid. It'll be immune to leveraged buyouts, and while it won't attract the flashiest of the flashy investment gurus, it won't need to, because it doesn't need to make a bunch of shareholders happy with maximized profits... it'll just need to make stakeholders (that's "we the people of the United States") happy.

The insurance companies hate it; they're willing to take the good (a mandate that everyone has health insurance coverage), but they're not willing to take the bad (competition demanding that they be more efficient than a government agency). Which is strange, since we've been assured that the government can never be more efficient than a private company.

But what it really comes down to is this: in order to beat the government at the insurance game, they'll have to play the insurance game the old fashioned way, making more prudent investments, finding ways to serve customers and maximize the value of their policies, and otherwise engaging actual, honest competition that is intended to benefit the consumer first and foremost.

People are more educated when it comes to insurance nowadays. We all know that the situation these days is getting tougher. So we have to be financially independent. And we can that by getting our own insurance.

Avery Gerner
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