The funny thing is that the insurance industry is obsoleting itself.
If they perfectly assess risk, your annual premium will just be your annual cost plus all of the administrative costs of insurance, so just self-insure. We're getting closer and closer to that, further eliminating any value that anyone gets from insurance.
If they perfectly assess risk, your annual premium will just be your annual cost plus all of the administrative costs of insurance
Uhh, no. That's not how insurance works.
The idea of insurance is pooling risk. So if you're perfectly healthy you are in essence paying for other people's treatment.
However, if you happen to run into very expensive health issues it's you that profits from the premiums of other people.
If insurance works as you describe it it wouldn't make sense at all and everybody would individually be responsible for her entire medical cost. With partially ruinous consequences for the individual.
If insurance works as you describe it it wouldn't make sense at all and everybody would individually be responsible for her entire medical cost. With partially ruinous consequences for the individual.
And better at real-time charging and paying for insurance in micro-increments. Predicting over the course of a year is hard, over the next microsecond, not so much.
Going to the gun range? Your insurance premium just went up by $6/hour. Speed in your car? Slam on your brakes suddenly? Driving quickly in heavy traffic? Drive at 3AM on Saturdays?
Actually, mandated insurance is perfectly in-line with what insurance is for. For n people, you now own a 1/n share of n risks that are not perfectly correlated with each other. Since people are assumed to be risk-averse and due to Jensen's inequality, your expected utility from paying your 1/n share is higher than your expected utility from taking a chance and either 1) paying nothing if you don't experience the adverse event, or 2) incurring the full cost of the adverse event.
I think what you're trying to say is that the aggregate risk remains the same under mandatory coverage, put that's going to be true no matter what and the effects of this risk can be optimally spread through insurance.
As an example, say $180 billion dollars worth of damage is done to 1 million homes in the US through natural disasters every year. With 300 million people in the US, mandated insurance would have everyone pay $600 a year to cover these damages. No insurance would mean you paid nothing unless your house was affected, at which point you lost on average $180,000. Insurance exists to pool the risks of these life-destroying events.
Insurance definitely isn't going away, in fact our capability to insure against a wide variety of events is in its infancy. The insurance market will only get more and more sophisticated. Hank Greenberg has some interesting thoughts on the direction of the industry.
Perfectly. Wow. You've confused a single-payer system with mandated-coverage for-profit insurance companies...that will somehow be forced by regulation to "optimize"...cost? Yeah. What's the CEO of UnitedHealthcare's nut, again?
Let's talk outcomes and efficiency, and not pretend charging doctors $39 to file "insurance" paperwork is anywhere close to optimal.
And, yes, aggregate risk for people will not change, as we, unlike our tools (e.g. a house), are only at equilibrium when we are dead.
Insurance companies that can better predict customer risk outcompete those that don't. They can charge less for lower-risk customers and still make a profit, thus drawing them away from their competitors and leaving their competitors with higher risk people who pay too little.
Yet, the end game is that everyone can predict risk so thoroughly that insurance is pointless.
It's ultimately a weird, backwards Tragedy of the Commons, and various non-discrimination laws are sort of the regulatory response to it.
Yet, the end game is that everyone can predict risk so thoroughly that insurance is pointless.
Not true. Suppose you have a 0.01% chance of needing a $10M treatment in your lifetime. First of all you can't say, "Oh I'll just self insure" because few people have $10M. Second, you may decide that paying $10,000 over the course of your lifetime is preferable to risking a payment of $10M.
Removing uncertainty doesn't eliminate the need for insurance, it just reduces the opportunity for risky subscribers to socialize their risk, and for insurance companies to reap gross profit.
Um, in both of those cases, removing the uncertainty would eliminate the need for insurance:
In the first, the insurance company would know, with certainty, who falls into that 0.01% category, and charge them $10m for insurance in their lifetime.
In the second, the insurance company, with certainty, would know what year the treatment is needed, and charge a $10m premium for that year only.
Ok, I guess what I mean is eliminating uncertainty in risk profiles. IMO we are headed towards a world with good risk profiling- but I doubt we are anywhere close to predicting the future with certainty.
Insurance companies are identifying things like "Driving at night increases risk of accident". They are nowhere close to, "A blue corvette driven by a 43 year old male will rear-end a ford pinto today"
As of January 2014, the ACA made it illegal to base premiums on current or past health status. So at least in the US pricing like this no longer occurs.
Which means that if your current and past health status are poor, you're probably aware of this, and should sign up for the best insurance you can, since you're far more likely to reap the benefits. You should overinsure yourself, and buy some investments in the hospitals that you're going to be visiting.
Those with above average current and past health status should enrol into the very least amount of insurance they can get away with.
This is, of course, why the law against changing premiums based on a person's health status was combined with a law requiring everybody to buy fairly comprehensive insurance whether or not they want it.
A 0.01% chance means uncertainty. Eliminating uncertainty would mean that you know your risk is either 1 or 0. If it's 0, you wouldn't buy insurance, and if it's 1, they wouldn't sell it.
Comments
The funny thing is that the insurance industry is obsoleting itself.
If they perfectly assess risk, your annual premium will just be your annual cost plus all of the administrative costs of insurance, so just self-insure. We're getting closer and closer to that, further eliminating any value that anyone gets from insurance.
The idea of insurance is pooling risk. So if you're perfectly healthy you are in essence paying for other people's treatment.
However, if you happen to run into very expensive health issues it's you that profits from the premiums of other people.
If insurance works as you describe it it wouldn't make sense at all and everybody would individually be responsible for her entire medical cost. With partially ruinous consequences for the individual.
I think that's his point.
The exact costs will never be calculable in advance.
We are never going to reach a point where we can accurately predict whether someone will be hit by a bus or shot.
But we're getting better and better at it.
And better at real-time charging and paying for insurance in micro-increments. Predicting over the course of a year is hard, over the next microsecond, not so much.
Going to the gun range? Your insurance premium just went up by $6/hour. Speed in your car? Slam on your brakes suddenly? Driving quickly in heavy traffic? Drive at 3AM on Saturdays?
Insurance is a mode of risk management. If we all have mandated coverage, then all risk is assumed, and the term "insurance" is meaningless.
Actually, mandated insurance is perfectly in-line with what insurance is for. For n people, you now own a 1/n share of n risks that are not perfectly correlated with each other. Since people are assumed to be risk-averse and due to Jensen's inequality, your expected utility from paying your 1/n share is higher than your expected utility from taking a chance and either 1) paying nothing if you don't experience the adverse event, or 2) incurring the full cost of the adverse event.
I think what you're trying to say is that the aggregate risk remains the same under mandatory coverage, put that's going to be true no matter what and the effects of this risk can be optimally spread through insurance.
As an example, say $180 billion dollars worth of damage is done to 1 million homes in the US through natural disasters every year. With 300 million people in the US, mandated insurance would have everyone pay $600 a year to cover these damages. No insurance would mean you paid nothing unless your house was affected, at which point you lost on average $180,000. Insurance exists to pool the risks of these life-destroying events.
Insurance definitely isn't going away, in fact our capability to insure against a wide variety of events is in its infancy. The insurance market will only get more and more sophisticated. Hank Greenberg has some interesting thoughts on the direction of the industry.
Perfectly. Wow. You've confused a single-payer system with mandated-coverage for-profit insurance companies...that will somehow be forced by regulation to "optimize"...cost? Yeah. What's the CEO of UnitedHealthcare's nut, again?
Let's talk outcomes and efficiency, and not pretend charging doctors $39 to file "insurance" paperwork is anywhere close to optimal.
And, yes, aggregate risk for people will not change, as we, unlike our tools (e.g. a house), are only at equilibrium when we are dead.
It's a fundamental paradox with insurance.
Insurance companies that can better predict customer risk outcompete those that don't. They can charge less for lower-risk customers and still make a profit, thus drawing them away from their competitors and leaving their competitors with higher risk people who pay too little.
Yet, the end game is that everyone can predict risk so thoroughly that insurance is pointless.
It's ultimately a weird, backwards Tragedy of the Commons, and various non-discrimination laws are sort of the regulatory response to it.
Yet, the end game is that everyone can predict risk so thoroughly that insurance is pointless.
Not true. Suppose you have a 0.01% chance of needing a $10M treatment in your lifetime. First of all you can't say, "Oh I'll just self insure" because few people have $10M. Second, you may decide that paying $10,000 over the course of your lifetime is preferable to risking a payment of $10M.
Removing uncertainty doesn't eliminate the need for insurance, it just reduces the opportunity for risky subscribers to socialize their risk, and for insurance companies to reap gross profit.
Um, in both of those cases, removing the uncertainty would eliminate the need for insurance:
In the first, the insurance company would know, with certainty, who falls into that 0.01% category, and charge them $10m for insurance in their lifetime.
In the second, the insurance company, with certainty, would know what year the treatment is needed, and charge a $10m premium for that year only.
Ok, I guess what I mean is eliminating uncertainty in risk profiles. IMO we are headed towards a world with good risk profiling- but I doubt we are anywhere close to predicting the future with certainty.
Insurance companies are identifying things like "Driving at night increases risk of accident". They are nowhere close to, "A blue corvette driven by a 43 year old male will rear-end a ford pinto today"
As of January 2014, the ACA made it illegal to base premiums on current or past health status. So at least in the US pricing like this no longer occurs.
Which means that if your current and past health status are poor, you're probably aware of this, and should sign up for the best insurance you can, since you're far more likely to reap the benefits. You should overinsure yourself, and buy some investments in the hospitals that you're going to be visiting.
Those with above average current and past health status should enrol into the very least amount of insurance they can get away with.
This is, of course, why the law against changing premiums based on a person's health status was combined with a law requiring everybody to buy fairly comprehensive insurance whether or not they want it.
A 0.01% chance means uncertainty. Eliminating uncertainty would mean that you know your risk is either 1 or 0. If it's 0, you wouldn't buy insurance, and if it's 1, they wouldn't sell it.
Only, those don't help, if people know how high their own risks are and if they can still decide whether to sign on.
Indeed, thus the recent regulatory push to require people to buy health insurance whether they want it or not.