Insurance Discussion
Posted: Fri Mar 16, 2012 5:35 pm
Insurance is an indemnity contract, whereby an Insurer agrees to indemnify the Insured against financial losses the Insured might sustain in connection with any one of a set of pre-defined, catastrophic events. Insurance fulfills a vital societal need and it has existed for a long, long time. Life entails certain risks of harmful events, and those events can result in financial losses that exceed an individual’s ability to cope. Without insurance, we would all face the real possibility of financial ruin as a result of an accident, a disease, or a natural catastrophe. Fortunately, the likelihood of those harmful events affecting any individual is relatively low. As a result, Insurance Companies can, by aggregating large numbers of similarly-situated people, spread the risk among them, so that (a) each Insured can pay a tolerable amount into the pool (Insurance Premiums), and (b) when catastrophe strikes any one of them, there is sufficient money in the pool to INDEMNIFY those affected individuals for the financial losses they sustain.
The insurance company is a business and has no money of its own to pay out to the insureds. Their business model is to (1) identify the specific risks that they are willing to indemnify, (2) control the population of insureds so that they are not accepting unreasonable “risks” from people who are very likely (or even certain) to sustain the indemnified losses, (3) ascertain, through statistical analysis, the likelihood of the covered losses occurring and the amounts that they will be required to indemnify, and (4) charge Premiums to the Insureds that cover those projected losses, as well as administrative costs and profit. Keep in mind that even if the insurance company were a public-sector entity, the only difference is that it would not be required to make a profit. It would still be required to take enough in premiums to cover the anticipated losses.
So to summarize, the Insureds – the policy holders – must pay every year (or whatever) enough money into the pool to cover the losses of the total pool, as well as administration costs and profit for the Insurer. That’s the way it works.
And it is noteworthy that the insurance company doesn’t “care” what risks it covers. It can cover every conceivable loss from the first dollar, or it can cover only catastrophic losses, starting after a significant “deductible” has been reached. IT DOES NOT MATTER TO THE INSURANCE COMPANY, ONE WAY OR ANOTHER, provided that the risks and the coverages are spelled out in advance, so that the premiums can be calculated accordingly. If you want better coverage, then your insurance premiums will be higher. It’s as simple as that.
Every rational insurance customer decides what, if any, risks s/he can and cannot accept, and decides to what extent insurance is required. To illustrate this decision process, consider the following example. You might have an “extra” car in your household, one that is several years old and is not used much. Ignoring statutory liability insurance, you need to decide whether and to what extent you need to insure that car. Could you tolerate a theft or collision loss of that car, or payment for damages incurred in a minor collision? You compare that risk and the potential expense to the cost of insuring it. You also might look at insuring it with a relatively high deductible in order to reduce the insurance premium to an amount you consider reasonable. You might accept the possibility of a thousand dollar collision loss, but don’t want to have to absorb a $5,000 total loss. I personally don’t buy collision insurance on my second car or motorcycle, because I can “self-insure” those losses, should they occur.
For health insurance, you have to similarly decide what coverage you need, considering the kinds of losses and expenses that you can “self-insure,” and compare your need for indemnification with the cost of the available insurance.
Most people who purchase their own health insurance (mainly the self-employed) opt for insurance that covers significant costs and expenses, but they self-insure things like doctor visits, prescriptions, vision care, dental (up to a point), and they also tolerate an annual “deductible,” which is an initial out-of-pocket expenditure that must be paid before the full insurance coverage begins. This approach optimizes the cost of insurance, which can be astronomical if it is comprehensive.
The cost of health insurance has increased dramatically over the past 40 years for a number of reasons, some of which are controllable and some are not:
Medical advances – particularly in the area of diagnostics, drugs, and enhanced therapy possibilities – have made new, expensive measures available and even routine,
Many conditions that were simply tolerated in the past, or associated with “Old Age,” are now considered treatable and are treated over long periods of time, and at great cost,
Because most people obtain their health insurance coverage through their employer, they often simply don’t care about the cost of healthcare, and they go to doctors and specialists frequently and tolerate costs and expenses that they would dispute emphatically if they were paying for them out-of-pocket,
Largely through the influence of large private unions and public sector unions, employees’ expectations have grown to include coverage of doctor office visits, routine dental and optical care, prescriptions, and other little nice-to-haves that were never even considered in the past.
When the subject of compulsory health insurance first arose in the United States, it was considered in the same light as compulsory liability insurance for autos. The rationale was, because uninsured losses are an “unfair” burden to society, the individual should be compelled to purchase some minimal level of insurance to mitigate this possible burden to the society at large. It wasn’t the individual who was the focus, but rather everyone else, who would have to indemnify the individual’s losses, if s/he lacked insurance.
Because of the rationale behind it, logic demands that COMPULSORY insurance be at a minimum level of coverage, with a relatively high out-of-pocket requirement, and only covering catastrophic diseases and injuries. The purpose of COMPULSORY health insurance is to protect SOCIETY against uninsured extraordinary medical expenses.
The recent political kerfuffle involves the customary low-cost insurance that colleges and universities often provide to students while they are at college. A few parentheticals should be mentioned in connection with this insurance. First of all, one of the reasons why colleges started providing this insurance was that it used to be common for the parents’ health insurance to stop covering the child when they reached age 18, or went off to college. Thus there was the possibility that a student could be injured at college and have no insurance coverage whatsoever. With the new mandate that health insurance policies cover children up to 26 years old, whether or not they are away at school, one of the main drivers behind the colleges making this insurance available is GONE. Second, from an insurance standpoint, the college students are presumably young and healthy – the kind of Insureds for whom the premium would be minimal anyway, since they are less likely than the general public to have costly medical problems. So it is understandable that this insurance policy would have a low cost and be attractive to parents considering health insurance options for an otherwise-uninsured college student.
Against this background, the whole argument about whether birth control pills ought to be included in the COMPULSORY coverage afforded to college students is absurd.
From an insurance standpoint it is absurd because the student coverage is intended to be minimal – protecting against serious injuries and diseases, not covering day-to-day expenses of the students. It’s not coverage to protect against having to skip a few Starbuck’s coffees a month to pay for some pills. OTOH, if the argument is that the typical coed (well over half the student population, at most schools) requires coverage for a thousand dollars a year in BC expenses, BRING IT ON! The premiums will simply go up by enough to cover this expense.
Is that what Ms. Fluke was advocating for? An increase to everyone’s premiums to cover her birth control pills? If so, the parents of young men purchasing this coverage may have an interest in the discussion.
From a government policy standpoint such a mandate is outrageous. To compel coverage of something this insignificant – not even considering whether it has the effect of facilitating behavior that the University teaches is morally unacceptable – countervenes the only rational basis for having compulsory health insurance coverage: protecting society from large, uninsured losses.
Notice I didn't use the word, "Slut" once in this essay. Not necessary.
The insurance company is a business and has no money of its own to pay out to the insureds. Their business model is to (1) identify the specific risks that they are willing to indemnify, (2) control the population of insureds so that they are not accepting unreasonable “risks” from people who are very likely (or even certain) to sustain the indemnified losses, (3) ascertain, through statistical analysis, the likelihood of the covered losses occurring and the amounts that they will be required to indemnify, and (4) charge Premiums to the Insureds that cover those projected losses, as well as administrative costs and profit. Keep in mind that even if the insurance company were a public-sector entity, the only difference is that it would not be required to make a profit. It would still be required to take enough in premiums to cover the anticipated losses.
So to summarize, the Insureds – the policy holders – must pay every year (or whatever) enough money into the pool to cover the losses of the total pool, as well as administration costs and profit for the Insurer. That’s the way it works.
And it is noteworthy that the insurance company doesn’t “care” what risks it covers. It can cover every conceivable loss from the first dollar, or it can cover only catastrophic losses, starting after a significant “deductible” has been reached. IT DOES NOT MATTER TO THE INSURANCE COMPANY, ONE WAY OR ANOTHER, provided that the risks and the coverages are spelled out in advance, so that the premiums can be calculated accordingly. If you want better coverage, then your insurance premiums will be higher. It’s as simple as that.
Every rational insurance customer decides what, if any, risks s/he can and cannot accept, and decides to what extent insurance is required. To illustrate this decision process, consider the following example. You might have an “extra” car in your household, one that is several years old and is not used much. Ignoring statutory liability insurance, you need to decide whether and to what extent you need to insure that car. Could you tolerate a theft or collision loss of that car, or payment for damages incurred in a minor collision? You compare that risk and the potential expense to the cost of insuring it. You also might look at insuring it with a relatively high deductible in order to reduce the insurance premium to an amount you consider reasonable. You might accept the possibility of a thousand dollar collision loss, but don’t want to have to absorb a $5,000 total loss. I personally don’t buy collision insurance on my second car or motorcycle, because I can “self-insure” those losses, should they occur.
For health insurance, you have to similarly decide what coverage you need, considering the kinds of losses and expenses that you can “self-insure,” and compare your need for indemnification with the cost of the available insurance.
Most people who purchase their own health insurance (mainly the self-employed) opt for insurance that covers significant costs and expenses, but they self-insure things like doctor visits, prescriptions, vision care, dental (up to a point), and they also tolerate an annual “deductible,” which is an initial out-of-pocket expenditure that must be paid before the full insurance coverage begins. This approach optimizes the cost of insurance, which can be astronomical if it is comprehensive.
The cost of health insurance has increased dramatically over the past 40 years for a number of reasons, some of which are controllable and some are not:
Medical advances – particularly in the area of diagnostics, drugs, and enhanced therapy possibilities – have made new, expensive measures available and even routine,
Many conditions that were simply tolerated in the past, or associated with “Old Age,” are now considered treatable and are treated over long periods of time, and at great cost,
Because most people obtain their health insurance coverage through their employer, they often simply don’t care about the cost of healthcare, and they go to doctors and specialists frequently and tolerate costs and expenses that they would dispute emphatically if they were paying for them out-of-pocket,
Largely through the influence of large private unions and public sector unions, employees’ expectations have grown to include coverage of doctor office visits, routine dental and optical care, prescriptions, and other little nice-to-haves that were never even considered in the past.
When the subject of compulsory health insurance first arose in the United States, it was considered in the same light as compulsory liability insurance for autos. The rationale was, because uninsured losses are an “unfair” burden to society, the individual should be compelled to purchase some minimal level of insurance to mitigate this possible burden to the society at large. It wasn’t the individual who was the focus, but rather everyone else, who would have to indemnify the individual’s losses, if s/he lacked insurance.
Because of the rationale behind it, logic demands that COMPULSORY insurance be at a minimum level of coverage, with a relatively high out-of-pocket requirement, and only covering catastrophic diseases and injuries. The purpose of COMPULSORY health insurance is to protect SOCIETY against uninsured extraordinary medical expenses.
The recent political kerfuffle involves the customary low-cost insurance that colleges and universities often provide to students while they are at college. A few parentheticals should be mentioned in connection with this insurance. First of all, one of the reasons why colleges started providing this insurance was that it used to be common for the parents’ health insurance to stop covering the child when they reached age 18, or went off to college. Thus there was the possibility that a student could be injured at college and have no insurance coverage whatsoever. With the new mandate that health insurance policies cover children up to 26 years old, whether or not they are away at school, one of the main drivers behind the colleges making this insurance available is GONE. Second, from an insurance standpoint, the college students are presumably young and healthy – the kind of Insureds for whom the premium would be minimal anyway, since they are less likely than the general public to have costly medical problems. So it is understandable that this insurance policy would have a low cost and be attractive to parents considering health insurance options for an otherwise-uninsured college student.
Against this background, the whole argument about whether birth control pills ought to be included in the COMPULSORY coverage afforded to college students is absurd.
From an insurance standpoint it is absurd because the student coverage is intended to be minimal – protecting against serious injuries and diseases, not covering day-to-day expenses of the students. It’s not coverage to protect against having to skip a few Starbuck’s coffees a month to pay for some pills. OTOH, if the argument is that the typical coed (well over half the student population, at most schools) requires coverage for a thousand dollars a year in BC expenses, BRING IT ON! The premiums will simply go up by enough to cover this expense.
Is that what Ms. Fluke was advocating for? An increase to everyone’s premiums to cover her birth control pills? If so, the parents of young men purchasing this coverage may have an interest in the discussion.
From a government policy standpoint such a mandate is outrageous. To compel coverage of something this insignificant – not even considering whether it has the effect of facilitating behavior that the University teaches is morally unacceptable – countervenes the only rational basis for having compulsory health insurance coverage: protecting society from large, uninsured losses.
Notice I didn't use the word, "Slut" once in this essay. Not necessary.
