Let’s put on our thinking caps for a moment when it comes to this matter of insurance. It’s a business. It proposes a deal. You pay them to pay you if certain contingencies occur. You are betting that these contingencies will happen, which is why you pay. They are betting that they won’t happen, which is why they make the promise to pay.
In search of probabilities, more information is always better than less information. The capacity of the industry to assess the likelihood of events unfolding is assisted by data scientists called actuaries. They are digging through every detail, feeding those details into models, and generating results. Actuaries are not rooting for or against any uncertainty in the future; they are merely cranking out measurable probabilities.
There are two kinds of probabilities: case and class. Case probability is a one-time event, like a coin flip. The outcome of the event has no implications for the successive tries. The probability of the coin landing on heads is 50 percent. If it lands on heads 20 times in a row, what is the probability it will land on heads on the 21st try? It is the same as it always was: 50 percent.
Class probability is cumulative over a larger population with far more variation. Here you can examine a range of variables that directly affect probabilities. If you have a population of drivers in which young men more commonly find themselves in auto accidents than older women, you can map that out as a probability set. You will eventually price out auto insurance in a way that makes it more expensive to insure young men, even if the young man in question has a perfect driving record.
You can see, then, that class probability is what actuarial science and the insurance industry itself are focused on. In the case of a coin flip, there is no real winner in the long run concerning any deal between an insurer and the insured. The probabilities are renewed with each occurrence.
But in class probability—which is the concern of life, home, and auto insurance—the risk is packed with uncertainties that are insurable at some price simply because there is a game afoot: the assessment of likelihoods for which there are two parties betting against each other.
Now let’s get to the gritty details. I’m taking out life insurance. I filled out a questionnaire. What meds am I on? How much exercise do I get? What is my height and weight? Do I smoke? Do I go skydiving or drive race cars? Do I travel internationally, and how often and where? Is my father alive, and if not, when did he die, and what was the cause of death? When did I last go to the hospital and why?
These are all incredibly intrusive questions. There is no reason to be offended. Every single one of them feeds into a database that is designed to crank out the probability of my death at some point in the future. The questionnaire would have likely asked about my vaccine status but did not, most likely because a hammer would come down on the industry. Otherwise, they want to know about anything and everything that affects probabilities and, hence, my premiums.
Tomorrow I head to a medical exam, conducted not by some random doctor but by the insurer itself. They will take my blood. They will examine my urine. They will weigh me and check my heart and blood pressure. It will be brutal, not because they are mean, but because they want to make money betting that I will not die before my term is up. If I don’t die, they win and I lose. If I do die, I win and they lose, except that I will be dead, so only my surviving beneficiaries win.
The whole process has given me tremendous internal reflection. Am I exercising too much or drinking too often? Why can I not give up my addiction to nicotine pouches, which will surely raise an eyebrow? How much higher will my premiums be because I’m probably 10 pounds overweight, and how much can I save if I lose those pounds? What kinds of changes in my lifestyle can I make to reduce the probability that I will kick the bucket and thus lower my monthly fees?
All of this slams you at once, all thanks to the insurance industry and the actuaries who are determining the class probabilities of my own personal mortality. The incentives it imposes on me are prescient and undeniable. My every sign of ill health costs me money. The incentives are aligned to nudge me to be better.
If you have followed me so far, you can anticipate my next observation.
None of this applies to health insurance. By law. Insurers cannot assess individual risk in determining premiums or offer packages specifically tailored to individual health. The excuse is that preexisting conditions can be considered when putting together packages of premiums and benefits. Those are all set by government.
This is all a consequence of Obamacare. The system has been tweaked a bit here and there to make it better, but the core of it is still in place. It is a system that forcibly combines huge risk pools. The actuaries are busy not in assessing individual risk, but rather that of large demographic groups.
This is not insurance. It is a socialism, but privatized, regulated, and tethered, but what a market economy would otherwise generate. In a market economy, health insurance would operate much like life, home, and auto insurance. Each person would have his own premium that would be calibrated based on diet, exercise, weight, and life habits generally.
Imagine what this would mean. The actuaries could be put to work based on issues of diet. They could tell us if we should be eating more or less meat, more or less sugar, salt, and so on. It would be genuinely scientific, not based on someone’s theories or speculations.
We would be strongly incentivized to control those aspects of our own health that are under our control. We could continue to smoke, for example, but discover that doing so is costing us $400 per month. That’s a deal we can accept or reject. Same with going to the gym or getting exercise. We all have problems being motivated to do that, but there is no motivation like finance. If regular exercise saves us $250 per month, it would be worth the time and energy to do it.
We are very far away from this system. This explains why premiums are so high; the system is so disconnected from actual health, cost overruns are out of control, the sector is blowing up to become ever larger, and health in general has undergone a huge decline at the same time. The insurance industry is not suffering from all of this because it benefits from third-party payment systems. Most subscribers have no clue what they are paying at all because businesses are forced to underwrite the entire thing.
It’s not just a bit of the system that needs tweaking. The entire thing needs to go. We really do need to start from scratch with some measure of accountability, market competition, and rational pricing systems. We are so far from that now that it is hard to see how we can ever unravel the mess that it has become.
I’m not here to offer a blueprint but simply to say that this is not insurance by any normal standard of insurance. Insurance still survives more or less intact on matters of home, auto, and life. I know this for sure because my life insurer is currently hounding me on every detail about my health. I get it and don’t mind. They have a business to run, and I need to service to purchase. So we come to a deal. I can make sense of this.
The health insurance market, in contrast, makes absolutely no sense. Nor is anyone particularly thrilled with it. The new bill passed by Congress and signed by the president makes some small changes that are good ones, but no one is taking on the big subject. This is not insurance, but rather a gigantic industrial subsidy that comes at our expense. We are no closer to health and a system that would incentivize and support it.
