Is the insurance system a scam?

Last year, my English teacher would periodically take time to rag on insurance and its questionable (in his mind) necessity. The way he put it, insurance is “just a way of making sure everyone is indebted to the rich” and that, when a policeman pulls you over and asks for your proof of insurance, he just wants “proof that you’re indebted to the rich.”

How much of this is reality based? Is insurance – the way it currently works in the United States – a bad system that doesn’t work for the consumer’s best interest? Is there a better way? What did my teacher mean?

Insurance works on the principle that the time when you lack money due to disaster/illness/accident etc is precisely the time when your unable to raise money. Its trading away money in absolute terms for stability of cash flow in the long term.

Think of it this way, would you rather have to pay a random amount between $0 and $200 for your electricity or a flat fee of $130? If you choose the random amount, you always have to set aside $200 even though on average your paying only $100. Witn insurance, it’s even more extreme since the chance of an accident is very small but the cost is very very large.

I am insurance poor. If I had kids, I suppose I would be more interested in having all kinds of insurance. I just made an evaluation of things when I was in my 30s. Like how much I had thrown into insurance and how much I had collected. I’m not an accident prone kinda guy, so insurance companies just love people like me. There’s so much small print and mumbo-jumbo in insurance policies I could never figure out what the hell they covered and what they didn’t anyway. I suppose if I get some gawd awful disease I will wish I had insurance. But, until then …

If your teacher hit my car so badly that it’s destroyed, and had no insurance, he’d have to pay for the full cost of my damages out of his own pocket. If he’s able to do that, then I agree that for him, insurance is unnecessary.

But if he cannot, then I am the one in trouble. I could sue him, but if he simply doesn’t have the cash, who is going to buy me a new car to replace the one that I have lost mine through no fault of my own?

Forcing your teacher to carry insurance protects the people he may damage by accident. Unless your teacher plans to get into accidents only with the rich, I don’t agree that it is only the rich that are benefitting.

That kind of insurance is “liability” insurance - it pays the people who have suffered a loss that’s your fault. “Collision” insurance pays your losses that are your fault. Collision insurance is generally not mandatory by law - if you choose to risk your own property, that’s fine. The law just forces you not to risk MY property.

(In my example, my own insurance company would pay if an illegally uninsured driver destroyed my car, so it’s a good thing I have insurance.)

  • Rick

Well, the basic premise of insurance is that you spend a small amount now, and get a large amount when you need it. The basic problem is that insurance companies are for-profit businesses. Even in an ideal setup, folks’ll never get back all the money they pump in - administration, overhead, and other costs eat up some of the cash. In real life, profits, investor payouts, and sometimes inflated executive salaries make even less money available.

Being made up of humans, insurance companies are not always perfectly ethical. Underpayment or denial of legitimate claims is not unheard of. On the flip side, fraudulent claims by customers cost money, and make it necessary to investigate many claims which also runs up a tab.

Between the various costs, money goes into insurance companies which never comes back out. This is inevitable, but probably could be minimized. Non-profit insurers do pretty well at it, but these are few and far between. A cooperative insurance company (in which the insured are also the owners, sort of) would probably make your prof a lot happier.

My advice, FWIW, is to insure only against unacceptable risks. For example, my collision had $1000 deductible since I could afford that much risk but would have been distinctly unhappy with more. Once it got to be close to 10 years old, I dropped the collision since the car’s value was below the deductible. On the other hand, if I kill someone and his widow sues me for several millions, I could lose everything I own. (That’s not actually true in Quebec with its no-fault liability, but that’s the principle.) Had I died when I still had young children, I didn’t want to leave my family destitute, so I had a lot of life insurance (mostly term, with four year’s salary from my employer). This is now gone; my kids are grown and my wife can live on the estate.

Bottom line: if you find the risk acceptable, don’t have insurance. But you could get totally wiped. Insure only against unacceptable risks.

By this logic, health insurance should be mandatory, because in case of catastophic illness or injury, the uninsured end up at emergency rooms, or default on medical debts, and the provider passes the losses on to everybody else. Why isn’t there a law requiring everyone to buy health insurance?

Besides, do you drive around without uninsured motorist insurance? If you do, you are taking an enormous risk, because in some states, uninsured motorists comprise as much as 30% of the drivers on the road. If you are going to buy uninsured motorist coverage anyway, what is the point in requiring everybody else to buy insurance also?

Everyone isn’t supposed “to get back all the money they pump in.” That’s not the way it works.

Insurance is basically a hedge against expensive risks; we know that out of say, 100 people, one person will have an accident, but we don’t know which one of the 100 that will be. So everyone pools a small amount of their money, and the one victim (whoever it turns out to be) gets compensated for their accident. 99 out of the 100 never get a dime back on the premiums they’ve paid, but that’s not the point – they were essentially paying to reduce their future uncertainty.

As for the rest of your posts – well, yes, insurance companies carry fixed overhead (executive salaries, fraud, etc), same as any other company. That’s OK, because a large insurance company can pull together a much larger pool of insureds, spreading the insured risks even further, which means that individual premiums will be lower even taking into account the costs of running a large-scale enterprise.

By the way, I would speculate that “the rich” pay a lot more in insurance premiums than others.

I wouldn’t consider myself rich, but as I’ve grown up and become more established, I’ve purchased more and more insurance. I now have car insurance, health insurance, homeowner’s insurance, professional liability insurance, and business insurance.

The problem with the insurance system in the US is that there are thousands of insurance companies, each with its individual corporate bureaucracy and stockholders which have to be supported. This eats up a lot of peoples’ premium dollars.

We’d be far better off if we folded all insurance functions into the social security system where the cost of administration of benefits is only about 1% vs. 30% for private insurance.

No fault car insurance is a scam, put into law by insurance companies who wanted higher profits by their lobbyists, and no fault does not benefit those who are more carefull than others.

Other forms of insurance have been around for centuries, are not a scam, and are a valuable service, freely purchased only by those who want it.

To address your first point, he wasn’t covering the “costs passed on to everyone” issue. Those are much smaller (at least when applied) and more spread out than if someone hit you and destroyed your car. It’s not like someone comes up to you and suddenly requires some surgery and you get stuck with a $15,000 bill.

(Regarding defaulting on medical debts and the costs of those to hospitals, if you’re going to go that far, you should realize that hospitals also have to absorb the cost of tests and other things that HMOs consider fully covered but only pay a certain amount of to the hospital. So that essentially happens even with people covered by HMOs, except that it’s all under contract! After all, what hospital would want to turn away patients who are covered by the major HMOs in their area?)

As for uninsured motorist coverage, that’s to protect against those folks who break the law by not getting required insurance. Just because they make a law against something doesn’t mean everyone’s going to follow it, after all! It’s like putting a burglar alarm on your home - or homeowner’s insurance - even though theft is illegal.

Sorry for the hijack, but I’m wondering about something : here, a lot of people use “mutuelles” (I don’t know the english word for them) instead of insurance companies. They work exactly the same way, except that they’re non-profit organizations instead of companies, and their administrators are elected by the members (everybody who is insured by them). They’re usually as large organizations as insurance companies (or perhaps even have more clients, I’m not sure).

Does it mean that such systems don’t exist in the US? Are they an european (or perhaps even french) peculiarity?

Clairobscur, we have them in Germany too.

Let’s see: a few things…

  1. Insurance companies can and do put out MORE in claims than they take in from premiums. Insurance companies INVEST – they take the vast reserves of policyholder money and sink them into stocks, bonds, real estate, capital ventures, etc. Huge claims (or multiple claims, as from a disaster) can force them to liquidate investments at a loss, but the normal business model permits a mature insurance company to operate almost entirely off of investment income. Premiums go mainly toward increasing the investments.

  2. Mutual insurance companies are owned by their policyholders; State Farm Insurance is (or started as) such a company. I am not aware, however, that any of these companies permit the degree of participation that clairobscur describes; I’ve certainly never received a proxy statement or slate of directors. Mutuals are not non-profit; in better times, they sent dividends to the policyholders.

  3. Your English teacher needs to pull his head out. By some standards, anyone who owns a car IS rich, and mandatory liability insurance protects everyone, including carless pedestrians, against the depredations of the aristocracy. :smiley: (Besides, truly rich people have a hell of a lot more insurance than the piddly 15/30/5 required by California law)

Recent insurance article FWIW:

http://www.usatoday.com/money/perfi/insurance/2003-10-09-mym_x.htm

So you don’t mind paying $357 per year*, every year, for people without health insurance? According to a report by the American College of Physicians, in 2001 uninsured patients received $98 billion in care, $35 billion of which was uncompensated. These costs were picked up by taxpayers in the form of state and federal assistance to hospitals, as well as losses passed on to paying patients and their insurance companies.

[sub]*$35 billion divided by 98 million taxpayers (1999)[/sub]

This seem to be more a debate than a search for verifiable facts, so I’ll move this thread to GD.

bibliophage
moderator GQ

This is a major question, and really even the big experts are still pretty much hard up themselves for good answers. We know basically how the markets for insurance work. We know the basic problems that make them inefficient. But especially for things like health insurance, there are way too many hard questions still unanswered to say things like “well, if there was a mandatory buy-in, it would all be okay” even putting the liberty issues aside.

It is true, however, that by default under current law, we have something of the worst of both worlds. We have tons of people who are uninsured who, by all accounts, probably should be. This is because many of them simply use the public health system and emergency rooms as their health care: often meaning that instead of cheap preventative measures, we all end up paying for extremely expensive treatments after the fact.

Right, hence, “even in an ideal setup, folks won’t get back all the money they pump in.” An ideal setup would be a good thing. My “folks” was plural, not a collective noun - I didn’t mean to imply that individuals should get their money back, but that as a group people should get as much back as possible.

**

I agree that it’s both okay and necessary, but it would be nice to see a nonprofit company. Profits are not overhead, but still draw from the pool of money which could be used to pay claims.

In terms of commerce and service, I’m a big fan of the profit motive and capitalism generally. But insurance muddies the waters IMHO, due to its importance and responsibilities. I’ve been a member of credit unions for years, for the same reasons.

Careful government regulation and oversight are the current solution. I suggest that a better one might be to introduce not for profit insurers with lighter regulation. People being people, we’d still need plenty of oversight.