The End of Risk Pooling

Another sign that we are increasingly on our own. The insurance industry is rapidly (and inexorably) eliminating the idea of risk pooling:

As insurers use the new techniques to get ever-more-refined estimates of what individual policyholders are likely to cost in the future, they may be tempted to charge people closer and closer to full freight for treating an illness or rebuilding a fire-damaged home. Then even those who benefited from the end of cross-subsidies could see their rates go up as they effectively are asked to pay their own way, rather than share the cost by pooling with others.

What are we likely to see in the future? Multiple baskets of risk in employer health insurance. Depending on individual history, rates will be different. It's possible that a company may refuse to hire you or offer you insurance as part of your pay package if your risk is too great.

Comments

[Tangurena]

I lived in South FL when Andrew hit, and most of the insurance companies tried to abandon writing homeowner coverage in the state. State regulators took a simple position: if you don't write homeowner policies, you aren't going to be allowed to write automotive policies. Insurance companies also had a cap of policies that they were permitted to cancel each year, and many took the step of refusing to write new coverage of any kind while cancelling the maximum each year.

Almost everyone living within about 3 miles of the ocean ended up having to purchase insurance from the state agency. Almost everyone else in the state ended up without "wind damage" coverage.

As the cost of insurance becomes fine tuned enough to accurately predict my "costs," then it becomes useless for me to purchase insurance, since so much of each premium ends up going to the sales rep, the fancy new buildings that the insurance companies have, all those fat salaries they pay themselves and the overpriced advertising they do. It would be far cheaper to put aside into a savings account the money I would be wasting on a policy of any kind, than to actually subsidize the fat cats and purchase a policy of any kind.

Oh, wait, the insurance companies purchased laws requiring me to purchase their products. Now doesn't that sound like a decent business model?

[tdl]

Interesting article. There are a couple take aways that I find interesting. Like Tangurena already said, where some insurers are moving with this is not insurance and they are going to put themselves out of business (my guess is that in five years they are going to be hurting themselves and revert back to risk pooling; if they don't "hedge funds" will!)

I also thinking that RMS (the risk predictors) have been overly enamored with their model. My guess is that they use normal distribution curves to try to understand rare events. The only problem with this is that truly random events are completely unanticipated and therefore not predictable in the manner RMS and the insurance companies are hoping (hence their inability to predict last years hurricane season.) I would imagine there is no where near enough information collected to understand that pattern of hurricanes (as well as other events,) we simply have not collected enough data (and it will be centuries before we do.) What are we left with? Risk pooling.

Furthermore, part of the problem here is the insurance companies running to regulators to give them legal cover not to fulfill their contractual obligations. I have no problems with insurers charging more for riskier behaviors, but I do have a problem when that risk is subsidized in order fulfill some political end or my insurer is "buying" an out from a state of federal regulator and I have no recourse. This is what happens when governments intervene in this manner, however. The insurers know it, the politicians know it, and the bureaucrats know it; it is always sold as some kind of social benefit, however.

In the end, increased risk should carry increased cost, but not to the extreme of having people pay premiums only to have to cover their expenses on their own. Granularity is good, but it should not deviate from the core business that insurers are in, the mitigation of risk.

Regards,
TDL

[TM Lutas]

Ah, another reason why the employer health insurance market should end. Were multi-state associational health insurance available, you could simply sign up with your church or other social group and stick with them throughout your life. Even if commercial insurers might abandon risk pooling, churches would keep it as a matter of social justice.

You're "increasingly on your own" in this case because the Democrats don't want to allow multi-state associational healthcare. It's an entirely artificial situation driven by political considerations.

[chadmalik]

A Single-payer healthcare system is just so friggin obvious as the solution....pool the risk nationwide. No company is big enough to handle it themselves. One way to make it happen politically might be to bribe the insurance co's by leaving the top end of the market to them.