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re: Does insurance violate the basic laws of economics?
Posted on 3/1/24 at 1:12 pm to Skippy1013
Posted on 3/1/24 at 1:12 pm to Skippy1013
A 100% no fault system would make insurance more expensive than it is now.
Posted on 3/1/24 at 1:14 pm to LSUFanHouston
There is a market problem, but not the one you are describing.
In insurance markets, customers functionally agree to pool risk. Such as, ‘You and I both have a 50% risk of getting cancer. Whichever of us does, we will be unable to cover the cost and will have to go into bankruptcy. Instead, you and I both agree to put up half of the cost of treating cancer, which we can each afford. Then, whichever of us ends up getting it, the cost is covered from that shared pool.’
Basically, it’s just simple risk pooling, and nothing about that dynamic violates market principles.
What does violate market principles is asymmetric information. Every intro to economics class will tell you that markets require 3 primary components for them to have any chance of being efficient. For some reason, as a society, we only seem to care about 2 of those components. The three conditions are the presence of competition, the absence of externalities, and the absence of asymmetric information.
Competition and externalities are covered extensively and most everyone seems to be broadly aware of these two requirements for markets to work. But the asymmetric information problem doesn’t get nearly enough attention. And as it relates to insurance markets, that comes into play when customers have to borderline go to law school just to be able to figure out what coverage they are purchasing. I know folks will respond with ‘read the fine print’ until they are blue in the face, but that’s frankly a bullshite copout to me. Anyone who is honest knows that insurance companies do everything in their power to obfuscate the extent of their coverage. And that 95%+ of insurance customers can not provide an accurate list of what is covered in their plan vs what is not.
That is the very definition of asymmetric information. When firms know what they are selling to customers, but customers do not know what they are buying from firms, there is no possible argument to make that the market will work efficiently. Efficient markets require the absence of asymmetric information, but asymmetric information is a core component of the business model of all modern US insurance providers. It is a fundamentally broken market that needs to be rebuilt from the ground up.
But I don’t trust anyone in our government to do that, so it’ll probably just have to stay broken
In insurance markets, customers functionally agree to pool risk. Such as, ‘You and I both have a 50% risk of getting cancer. Whichever of us does, we will be unable to cover the cost and will have to go into bankruptcy. Instead, you and I both agree to put up half of the cost of treating cancer, which we can each afford. Then, whichever of us ends up getting it, the cost is covered from that shared pool.’
Basically, it’s just simple risk pooling, and nothing about that dynamic violates market principles.
What does violate market principles is asymmetric information. Every intro to economics class will tell you that markets require 3 primary components for them to have any chance of being efficient. For some reason, as a society, we only seem to care about 2 of those components. The three conditions are the presence of competition, the absence of externalities, and the absence of asymmetric information.
Competition and externalities are covered extensively and most everyone seems to be broadly aware of these two requirements for markets to work. But the asymmetric information problem doesn’t get nearly enough attention. And as it relates to insurance markets, that comes into play when customers have to borderline go to law school just to be able to figure out what coverage they are purchasing. I know folks will respond with ‘read the fine print’ until they are blue in the face, but that’s frankly a bullshite copout to me. Anyone who is honest knows that insurance companies do everything in their power to obfuscate the extent of their coverage. And that 95%+ of insurance customers can not provide an accurate list of what is covered in their plan vs what is not.
That is the very definition of asymmetric information. When firms know what they are selling to customers, but customers do not know what they are buying from firms, there is no possible argument to make that the market will work efficiently. Efficient markets require the absence of asymmetric information, but asymmetric information is a core component of the business model of all modern US insurance providers. It is a fundamentally broken market that needs to be rebuilt from the ground up.
But I don’t trust anyone in our government to do that, so it’ll probably just have to stay broken
Posted on 3/1/24 at 1:17 pm to funnystuff
How many customers don’t care what they are purchasing and don’t want to be educated, they just want the cheapest policy because it’s all the same in their mind?
Posted on 3/1/24 at 1:17 pm to DCtiger1
Please explain…all of the lawyers and the blame game would be removed
Posted on 3/1/24 at 1:20 pm to funnystuff
quote:
And that 95%+ of insurance customers can not provide an accurate list of what is covered in their plan vs what is not.
They don’t care to know, they just want it cheap
Posted on 3/1/24 at 1:33 pm to LSUFanHouston
You're misunderstanding the product. Insurance is just buying into a risk pool for a fixed price and stipulated conditions.
It isn't anything else.
It isn't anything else.
Posted on 3/1/24 at 1:45 pm to funnystuff
This is similar to saying people got screwed by their mortgage company because they didn’t know their rate would adjust….or that they owed that amount even if the value of the home went down….or how interest works.
We can’t build our systems based on what effort the lowest common denominator is willing to put in to what they’re buying.
We had national news outlets bemoaning that Business Interruption Insurance wouldn’t pay for lost revenue due to COVID shutdowns with everyone blaming the evil insurance companies. BI coverage has always been written and priced to cover loss from shut down due to a property loss. It never was intended to cover govt mandate closures due to a virus. Anyone with a 7th grade education can read this in the policy.
We can’t build our systems based on what effort the lowest common denominator is willing to put in to what they’re buying.
We had national news outlets bemoaning that Business Interruption Insurance wouldn’t pay for lost revenue due to COVID shutdowns with everyone blaming the evil insurance companies. BI coverage has always been written and priced to cover loss from shut down due to a property loss. It never was intended to cover govt mandate closures due to a virus. Anyone with a 7th grade education can read this in the policy.
This post was edited on 3/1/24 at 1:47 pm
Posted on 3/1/24 at 1:48 pm to SquatchDawg
quote:
We can’t build our systems based on what effort the lowest common denominator is willing to put in to what they’re buying
Exactly. What percentage of consumers do you think check vehicle safety ratings or just overall vehicle ratings when purchasing a vehicle?
Posted on 3/1/24 at 2:03 pm to LSUFanHouston
Every business tries to give you the least value for your money at the most profit possible. The free market creates competition that over time reduces profit margins and increases value to the consumer. Insurance attempting to deny claims is part of that capitalistic concept. You have to think of insurance policy holders as a single consumer, and the insurance denying claims on any individuals increases their overall margin
Posted on 3/1/24 at 5:41 pm to SquatchDawg
quote:No it isn’t. Adjustable rates are one, single, isolated datapoint that a customer must affirmatively decide whether or not they want. It is absolute in its nature, and it is stated plainly as a headline item in any mortgage you take out. I’d venture a guess that less than 15% of mortgage holders are unsure if they have a variable or fixed rate mortgage… in comparison, I’d be shocked if more than 1% of the population could accurately communicate the full scope of their insurance coverage.
This is similar to saying people got screwed by their mortgage company because they didn’t know their rate would adjust
If you can’t admit how different that is from what insurance companies are doing, then I don’t think you are prepared to have an honest conversation about the state of the market.
Posted on 3/1/24 at 6:40 pm to Nutriaitch
quote:
I own my house (or will own it outright in a little over a year from now). my house took significant damage from Hurricane Ida. If I pay for all of those damages out of pocket (which I ended up doing thanks to my homeowner's insurance company filing bankruptcy in Ida's wake), then you have to tack that $70k on to what I paid for the house. but the value of my house doesn't increase by $70k despite me spending that on it.
????
Your house is worth one number damaged from the hurricane and unlivable and a higher number after you’ve paid to fix it
Posted on 3/1/24 at 7:06 pm to DCtiger1
At least it's not a fricking Owlfan thread
Posted on 3/1/24 at 7:36 pm to chalmetteowl
quote:
Your house is worth one number damaged from the hurricane and unlivable and a higher number after you’ve paid to fix it
ok follow me.
before Ida, house is worth $200k.
Ida fricks it up.
while fricked up, it’s no longer worth $200k. Nobody is paying full value for a house that needs extensive repairs. So at a minimum that $70k worth of necessary repairs gets knocked off the value. so all fricked up, it’s worth $130k at best.
so i spend the $70k to fix it, and house is once again worth $200k.
i’ve now spent $270k for a $200k house.
The house won’t sell for $270k even though that’s what i have invested in it.
Because it’s worth $200k.
so i’m out $70k either way.
Posted on 3/1/24 at 9:15 pm to Sidicous
quote:I hate insurance companies just as much as everyone else, but what would you propose we replace mandatory liability auto insurance with?
Except in the case of mandatory auto insurance by law was exactly what the insurance companies, not the citizens/consumers were asking. I remember the ads on tv pushing for the law change. Ads sponsored exclusively by the insurance companies and not a single one by any group or segment of the public.
The ads were anti-economic because even as a child of <12 I understood once required by law the costs would climb astronomically, and that’s exactly how it has played out. All the “value” was screwed by price gouging the law abiding.
You want more retards driving around uninsured?
Posted on 3/1/24 at 9:34 pm to DCtiger1
quote:
How many customers don’t care what they are purchasing and don’t want to be educated, they just want the cheapest policy because it’s all the same in their mind?
Never had a client complain of having too much coverage or low deductibles when a claim occurred. But they always swore they purchased “full coverage” when they were hit by an uninsured driver.
Posted on 3/1/24 at 9:39 pm to Jack Daniel
quote:
No, “owning” things people can’t afford is what creates the need for insurance.
Lol
Simplistic thoughts sound great usually.
Posted on 3/1/24 at 9:43 pm to LSUFanHouston
quote:
but the company does everything in their power to avoid having to actually provide the good or service
Tell me youve been brainwashed by the billboard trash attorneys without telling me
Posted on 3/1/24 at 9:48 pm to AmishSamurai
quote:
n reality, your health insurance, your car insurance, all insurance should be priced at the individual risk leve
Well, by definition:
Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that only some insureds may incur.
The company pools clients’ risks to make payments more affordable for the insured.
Sorry, you can't insure at your own risk. But, you could self-insure yourself for your individual risk and predilections.
Posted on 3/1/24 at 11:32 pm to LSUFanHouston
quote:
The reduction of financial risk has no value when there is no actual loss. At least not to the purchaser, and at least not in any quantifiable way.
Let’s say a company determines that they could be responsible for 100mm in liability damages in a given year from their operations. Instead of having to set aside 100mm to cover themselves, they pay ~5mm in order to have it covered.
They can then use that extra 95mm to invest in themselves; growth, R&D, debt payoff, etc.
You couldn’t be further from wrong.
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