Auto Insurance Principles Should Apply To Health Insurance March 30, 2007
Posted by admin in : Tips On Car Insurance Selection , add a commentAuthor:
Melih Oztalay
Article:
Many Americans rely on their automobiles to get to work. No
automobile means no job, no rent or mortgage money, no food. A
single parent, struggling to make ends meet in the suburbs with
100,000 miles on the odometer, would presumably welcome the
guaranteed opportunity for low-priced insurance that would take
care of every possible repair on her auto until the day that it
reaches 200,000 miles or falls apart, whichever comes first.
Especially if the insurance is valid regardless of whether she
even changes the oil in the interim.
So why aren’t the auto insurance companies writing such
coverage, either directly or through used auto dealers? And
given the importance of reliable transportation, why isn’t the
public demanding such coverage? The answer is that both auto
insurers and the public know that such insurance can’t be
written for a premium the insured can afford, while still
allowing the insurers to stay solvent and make a profit. As a
society, we intuitively understand that the costs associated
with taking care of every mechanical need of an old automobile,
particularly in the absence of regular maintenance, aren’t
insurable. Yet we don’t seem to have these same intuitions with
respect to health insurance.
If we pull the emotions out of health insurance, which is
admittedly hard to do even for this author, and look at health
insurance from the economic perspective, there are several
insights from auto insurance that can illuminate the design,
risk selection, and rating of health insurance.
Auto insurance comes in two forms: the traditional insurance you
buy from your agent or direct from an insurance company, and
warranties that are purchased from auto manufacturers and
dealers. Both are risk transfer and sharing devices and I’ll
generically refer to both as insurance. Because auto third-party
liability insurance has no equivalent in health insurance, for
traditional auto insurance, I’ll examine only collision and
comprehensive insurance - insurance covering the vehicle - and
not third-party liability insurance.
Bumper to Bumper
The following are some commonly accepted principles from auto
insurance:
* Bad maintenance voids certain insurance. If an automobile
owner never changes the oil, the auto’s power train warranty is
void. In fact, not only does the oil need to be changed, the
change needs to be performed by a certified mechanic and
documented. Collision insurance doesn’t cover cars purposefully
driven over a cliff.
* The best insurance is offered for new models. Bumper-to-bumper
warranties are offered only on new cars. As they roll off the
assembly line, automobiles have a low and relatively consistent
risk profile, satisfying the actuarial test for insurance
pricing. Furthermore, auto manufacturers usually wrap at least
some coverage into the price of the new auto in order to
encourage an ongoing relationship with the owner.
* Limited insurance is offered for old model autos. Increasingly
limited insurance is offered for old model autos. The
bumper-to-bumper warranty expires, the power train warranty
eventually expires, and the amount of collision and
comprehensive insurance steadily decreases based on the market
value of the auto.
* Certain older autos qualify for additional insurance. Certain
older autos can qualify for additional coverage, either in terms
of warranties for used autos or increased collision and
comprehensive insurance for vintage autos. But such insurance is
offered only after a careful inspection of the automobile itself.
* No insurance is offered for normal wear and tear. Wiper blades
need replacement, brake pads wear out, and bumpers get dings.
These aren’t insurable events. To the extent that a new car
dealer will sometimes cover some of these costs, we intuitively
understand that we’re ‘paying for it’ in the cost of the
automobile and that it’s ‘not really’ insurance.
* Accidents are the only insurable event for the oldest
automobiles. Accidents are generally insurable events even for
the oldest autos; with few exceptions service work isn’t.
* Insurance doesn’t restore all vehicles to pre-accident
condition. Auto insurance is limited. If the damage to the auto
at any age exceeds the value of the auto, the insurer then pays
only the value of the auto. With the exception of vintage autos,
the value assigned to the auto goes down over time. So whereas
accidents are insurable at any vehicle age, the amount of the
accident insurance is increasingly limited.
* Insurance is priced to the risk. Insurance is priced based on
the risk profile of both the automobile and the driver. The auto
insurer carefully examines both when setting rates.
* We pay for our own insurance. And with few exceptions,
automobile insurance isn’t tax deductible. As a result, the fear
of increasing insurance rates due to traffic violations and/or
accidents changes our driving behavior and we sometimes select
our automobiles based on their insurability.
Each of the above principles is supported by solid actuarial
theory. Although most Americans can’t describe the underlying
actuarial theories, most everyone understands the above
principles of auto insurance at the intuitive level. For sure,
as indispensable automobiles are to our lifestyles, there is no
loud national movement, accompanied by moral outrage, to change
these principles.
Unsustainable Market
In contrast, similar principles are routinely violated in health
insurance. To demonstrate this, let’s return to the same
suburban mother from the opening paragraph. She’s busy working,
driving to and from work, and driving her kids to school and
activities. She ends each day exhausted, sitting on the couch
with fast food. She’s obese, has a sedentary life, a bad diet,
and hasn’t taken the time to go to the doctor in years. After a
simple injury doesn’t heal for weeks, she turns up at the
emergency room and learns she has type II diabetes. Although
type II diabetes is controllable, changing diet and exercise
habits and properly tracking her condition takes time and effort
and she’s never quite successful in implementing the necessary
lifestyle changes.
So the initial emergency room visit is only the first of a long
list of health care related to non-controlled diabetes and other
problems associated with obesity. Whether she has individual or
group insurance, her insurance pays for each episode of care,
without singling her out for a premium increase, and without
charging her any more cost sharing than is charged to the
healthiest and most medically diligent insureds. Her coverage
continues until she voluntarily changes insurance companies
and/or employers or becomes eligible for Medicare. If she’s
covered under group insurance she may not even pay any premium.
Her insurance continues unabated, even though the disease was
caused by neglecting her body and she maintains her poor
lifestyle even after the disease becomes known.
This just wouldn’t happen in auto insurance. This scenario is
the auto insurance equivalent of guaranteed access to low-priced
auto insurance that takes care of every possible repair,
including damage already done, until the day the car falls apart
so completely it’s unsalvageable (death) or reaches 200,000
miles (Medicare), regardless of whether she even changes the oil
(takes care of herself) in the interim.
As a society, we don’t expect this in private-market auto
insurance, but we expect it in private-market health insurance.
Furthermore, there’s a chorus of national and state interests,
which continuously pushes us further away from the auto
insurance principles.
The current private health insurance market isn’t sustainable.
Prices have been consistently increasing faster than inflation
for decades. Each year, insureds use more health care than ever
before and more people have no insurance at all. Most actuaries
and other people in the private health insurance market don’t
want national health insurance with its bureaucracy and
one-size-fits-all benefits. Yet, we’re trying to sustain a
private insurance system, which violates the very principles we
know are necessary for private insurance markets.
Yes, health insurance involves the sacredness of human life and
is therefore different from auto insurance. But if we’re to
sustain a private-market solution to health insurance, actuaries
need to explain to the larger society, in terms that society
understands, the rationale for the following principles:
* As sacred as health care is, it’s still an economic
transaction that has to be balanced by individuals and
societies, against other economic choices. It can’t be
unlimited. Sometimes it will be secondary to other choices. On a
given day, for example, the mother in our scenario may value her
car more than her health.
* Insurance premiums should be paid by the individual and tied
to controllable risk factors. This will provide the best
incentive for the control of risk factors.
* Although it’s hard to draw the line between abuse, neglect and
ignorance, self-abuse shouldn’t be insured and we need to draw
that line somewhere.
* The private market can’t provide unlimited, self-directed
health insurance.
* Routine care and ongoing treatments of chronic conditions can
be pre-funded, can even be subsidized, but they don’t constitute
‘insurable events.’
* Insurance can’t be expected to keep every human body in
pristine condition. No amount of health care will prevent
everyone’s ultimate death.
* Comprehensive, unlimited, non-subsidized private-market
coverage isn’t possible for people with severely impaired health.
* The private health market can provide limited non-subsidized
health insurance, such as protection from accidents, to even
health-impaired individuals.
* Individuals who can afford to do so and who take good care of
themselves should be able to ‘buy up’ to better coverage. People
have the option of buying up for everything else in life.
Discussion of these principles is lacking from most of the
current health insurance debate. If society can intuitively
understand how similar principles apply to health insurance,
then they should be able understand the principles in the health
insurance context. We need to initiate the debate.
This commentary is solely the opinion of its author. It does not
express the official policy of the American Academy of
Actuaries; nor does it necessarily reflect the opinions of the
Academy’s individual officers, members, or staff
Contingencies, Jan/Feb 2007
About the author:
Melih (”may-lee”) Oztalay, CEO SmartFinds Internet Marketing
Web: http://www.precedent.com www.precedent.com
EMail: melih@hsfideas.com Precedent - Health Insurance For The
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