Insurance is the process whereby a group of people pool their resources together (voluntarily or by law) to mitigate a risk that results from incomplete information about who and how many will be adversely affected by the outcome that results if the risk is realized.<\/p><\/blockquote>\n
This definition may seem a bit more complicated than the Merriam-Webster definition<\/a> \u2018an agreement in which a person makes regular payments to a company and the company promises to pay money if the person is injured or dies, or to pay money equal to the value of something (such as a house or car) if it is damaged, lost, or stolen\u2019<\/em> but they both convey the same ideas.\u00a0 I\u2019ll list those ideas and then explain them a bit with some examples.<\/p>\n The key features of insurance are:<\/p>\n To understand this definition in more detail let\u2019s consider a very simple case.\u00a0 Suppose there is a rare disease that affects only 10 percent of the population and which causes a long term disability where a person can\u2019t earn a living for 10 months.\u00a0 The situation can be presented schematically as<\/p>\n Now suppose that you are one of the people who could be afflicted.\u00a0 How much money should you save to mitigate the risk?\u00a0 Well, if you were mitigating this risk by yourself, the answer would be that you would have to save up 10 months of reserves (money, food, water, whatever) against the possibility that you would be the target.\u00a0 If you cooperated with the nine others in the community, than each of you could save 1 month of reserves with the idea that all of you would contribute to the one who gets ill.\u00a0 This savings for the possible use by someone else is called the premium<\/em><\/strong>.<\/p>\n On the surface, all of this should seem very familiar and quite obvious. There are, however, several sets of tricky questions with which one has to wrestle.<\/p>\n First, it is clear that the situation is clearly advantageous for the one who gets sick but is it advantageous for those who remained healthy? True they only had to save 1\/10 of what they would have had to save otherwise but that 1\/10 is now gone and they cannot use it unless they become sick.\u00a0 In the case where each person mitigates his own risk, he is in complete control on how to judge that risk.\u00a0 He can decide at some point to stop worrying about the disease and he can begin to tap into his reserves.\u00a0 He can guess right or wrong, but he is the one making the choice.\u00a0 In the case of the ten-person community, each person surrenders control of their premium. \u00a0\u00a0Who then decides?\u00a0 How are the decisions reached?\u00a0 Since control is now surrendered, it often turns out that one or more of the healthy members regrets paying the premium, regarding it as a waste of resources. \u00a0\u00a0How does the system work if too few people participate because they reason that way?\u00a0 Should they be forced by law to do so (as is the case for car insurance)?<\/p>\n Second, is it always the case that exactly 1 person out of the 10 will get sick?\u00a0 Generally, the rate of infection is an average measure with some outbreak having fewer victims and others having more.\u00a0 How much should each member really donate to handle this uncertainty? \u00a0\u00a0Who gets to hold onto the reserves should no one get sick?\u00a0 How should the community divide the reserve if more than one member gets sick and there simply isn\u2019t enough to satisfy the need?\u00a0 Answering these questions and caring for the reserves became the responsibility of the insurance industry. They employ armies of statisticians, called actuaries, who try to set reasonable amounts for the premiums.\u00a0 They also seem to employ armies of brokers for determining where the reserves go when not being paid out (e.g., where does the money get invested) and armies of lawyers to make sure only the minimum amount is paid.\u00a0 How should the community as a whole regulate these armies?\u00a0 What are the rights of the individual?\u00a0 What are the rights of the firm?<\/p>\n Both of the previous sets of questions naturally arise from the basic arrangement of insurance as defined above and are worth debate.\u00a0 But there is a third and trickier set of questions that are often posed that where the concept of the \u2018if part\u2019 is stretched outside of a decent boundary.\u00a0 When these mental gymnastics are engaged, the term insurance becomes mangled and its meaning is broaden to the point where it becomes meaningless.<\/p>\n This situation occurs when the \u2018insurance\u2019 is used to mitigate an adverse outcome that is guaranteed to happen.\u00a0 It is not a case of \u2018if\u2019 but of \u2018when\u2019.\u00a0 As a concrete example, consider the question as to when members of our 10-person community will become hungry?\u00a0 Clearly hunger is an adverse outcome (\u2018bad part\u2019) that can be solved with an allocation of resources (\u2018payout part\u2019) but is it a risk (\u2018if part\u2019)?<\/p>\n If the community were farmers then the hunger question could be recast as a risk if the insurance where stated as \u2018If a member\u2019s crops should fail then that member would go hungry and crop insurance would satisfy a claim\u2019.\u00a0 But it is wrong to call protections against any occurrence of hunger an insurance.<\/p>\n Consider a car insurance policy.\u00a0 No insurer includes items of standard maintenance like oil change, replacement of wiper blades, shocks, struts, and tires.\u00a0 Even more ridiculous would be the expectation of an insurance policy that protects against running of gas - not in the sense of being stranded on the road - but in the simple and regular sense of having consumed gasoline in the course of driving. \u00a0Yet when applied to health care, insurance against 'if parts' (broken leg, chronic or critical disease) get lumped together with other things and the whole package is called insurance. \u00a0This muddies the water and prevents us as a society from allocating proper resources for the poor and needy.<\/p>\n Let me be clear, I am not against having societal protections against hunger or methods for making sure other health needs of the poor or disadvantaged are being met.\u00a0 But it is disingenuous to call those protections a type of insurance.\u00a0 Doing so seems to be a marketing technique that is designed to confuse two related but distinct issues in the minds of the electorate. \u00a0It also seems to me to be most advantageous for those companies offering these types of 'insurance'.<\/p>\n (The interested reader is encouraged to read about the distinctions between term life insurance<\/a> and \u2018whole life insurance\u2019<\/a> and the debate on Wikipedia about whether it is better to call the latter by the term assurance<\/a>.)<\/p>\n","protected":false},"excerpt":{"rendered":"\n
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