Opinion

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Closing Range

What Insurance Is, and What It Isn’t

Neither Medicaid nor Medicare are actually insurance

The war in Helena over Medicaid expansion (or contraction) is in full scream right now. But the debate really isn’t about insurance, because neither Medicaid nor Medicare are actually insurance. They’re entitlements.

Insurance is about managing risk of loss, usually by pooling resources. Modern insurance got its start at sea, as global trade became possible with better navigation in the late Middle Ages and early colonial periods. The biggest chunks of wealth with the highest chance of loss were merchant vessels. Pirates, weather, navigation mistakes, disease were all factors which could each cause total loss of not only lives, but relatively major investments.

The existing concept of “mutual aid” grew into formation of syndicates to insure sailing ships and their cargo. Let’s simplify and assume we have 10 identical ships, cargoes and voyages between the same ports. Last year, one sank. For this year, our 10 ship owners agree to pay 10 percent of the value they’d lose with a sinking (and a cargo they bought) into a shared kitty. Next year, no loss, so the money stays in the kitty. Next year, two losses.

Without a syndicate, two shippers would be out, losing everything. But because of the pooled risk, all 10 of our shippers are still around, just 10 percent poorer – way better.

Over time, knowledge and experience smooths out the bumps. No longer worrying about losing it all, our insured fleet grows to 100 ships with losses averaging five a year as we sail better, with better maps, on better ships. Not only that, but the clerks in the counting room report that Black Flag Lines sinks too many ships, while Green Flag has lost none. Do we continue to charge Black same as Green? Nope.

As we get to 1,000 ships, we’ve got even more information as to possible losses – but the critical point is, the overall shared financial risk for both insured and underwriter declines, most importantly in terms of what is known, and unknown; the foreseen versus the unforeseen.

This also explains why “corporate” or “government” insurance is often much cheaper per person that it is for a small businessperson or individual. Hundreds or thousands of people in certain jobs doing certain things create all sorts of data that actuaries can understand. That’s why Black Flag’s drunk, inept captains get charged more than Green Flag.

Further, those in the pool balance between those who make claims, and those who don’t, or won’t. But if you’re in a unique job, in a unique place, well, there might be a unique threat lurking, sort of like an unmarked rock in thousand-fathom seas where you’re the only “ship” sailing, a lot like the unknowns that led to the first ship syndicates.

Another factor when it comes to individual underwriting is kind of ironic. Paying a premium is essentially betting to lose. If you decide to get insurance, you’re thinking you will need it more likely than not, correct? You hope (sort of) you’ll end up getting more back than you paid in premiums, right?

Conversely, the insurance company is betting you won’t collect more than you’ve paid. So are they going to charge an individual about whom they don’t know everything the same as a member of a larger group about which they DO know everything (at least in an actuarial sense of the knowns and unknowns)? Nah.

And remember those drunk, inept, Black Flag captains? Let’s say they are drivers instead. Some people would say they are “high risk” drivers, being drunk and stupid. But the real way to view the Black Flaggers is by considering them as “high probability of foreseeable loss” operators, highly likely to wreck. The premiums are higher than for Green Flag’s sober experts, of course – if insurance can be had at all.

We could, of course, come up with a program to “insure” Black Flag’s drivers at everyone else’s expense, but again, we can fully expect high losses (and high premiums) without any “risk” of being wrong. Are Black Flag’s drivers entitled to such a thing?

Well, consider that Medicare users are, after age 65, highly probable to have perfectly foreseeable medical expenses. And those on Obamacare and/or Medicaid, who can’t afford to pay for the medical care they foreseeably require? That’s not insurance.