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Does insurance violate the basic laws of economics?
Posted on 3/1/24 at 10:02 am
Posted on 3/1/24 at 10:02 am
In a normal economic transation, a customer pays money to a company in exchange for a good or service. The cost of said good or service is usually in some way tied to the costs incurred to provide it, plus a percentage for profit, with potential for market adjustment. In turn, the costs are generally based on the quality of the product or service.
However, when it comes to insurance, a customer pays money to a company in exchange for a good or service, but the company does everything in their power to avoid having to actually provide the good or service. But if they actually do have to provide a good or service to someone, it may well cost them significantly more than the customer paid for it. Furhter, outside of top-side limits, no one, the customer nor the company, knows at the time the price is charged, if they will have to provide anything or what the cost of that will be.
Further, in certain instances, the purchase of insurance product is required by government (such as auto insurance if you want to drive) or as a condition of another financial transaction (getting a mortgage to buy a house).
The current LA insurance commissioner seems to be taking the position that if we remove some government regulation, then free market ecomomics will prevail, more supply will enter the market (more companies offering more polices) and the rules of supply and demand dictate that costs to purchasers should fall (much like the more companies making 60 in televisions, the cheaper a 60 in television will be).
But if the basic laws of economics don't apply to insurance, then is a "free market" solution the correct one?
However, when it comes to insurance, a customer pays money to a company in exchange for a good or service, but the company does everything in their power to avoid having to actually provide the good or service. But if they actually do have to provide a good or service to someone, it may well cost them significantly more than the customer paid for it. Furhter, outside of top-side limits, no one, the customer nor the company, knows at the time the price is charged, if they will have to provide anything or what the cost of that will be.
Further, in certain instances, the purchase of insurance product is required by government (such as auto insurance if you want to drive) or as a condition of another financial transaction (getting a mortgage to buy a house).
The current LA insurance commissioner seems to be taking the position that if we remove some government regulation, then free market ecomomics will prevail, more supply will enter the market (more companies offering more polices) and the rules of supply and demand dictate that costs to purchasers should fall (much like the more companies making 60 in televisions, the cheaper a 60 in television will be).
But if the basic laws of economics don't apply to insurance, then is a "free market" solution the correct one?
24
Posted on 3/1/24 at 10:04 am to LSUFanHouston
It's 100% fear based sales.
Posted on 3/1/24 at 10:06 am to LSUFanHouston
Maybe read your fine print of insurance policies before you assume insurance policies are going to pay out for any and every.
Posted on 3/1/24 at 10:07 am to Shexter
quote:
It's 100% fear based sales.
Then insurance companies wouldn’t be running for the hills and collapsing
Posted on 3/1/24 at 10:08 am to LSUFanHouston
Jesus fricking Christ with these threads.
Posted on 3/1/24 at 10:10 am to Chad504boy
Nah baw I just want the cheapest policy but I didn’t agree to no % deductible.
Posted on 3/1/24 at 10:11 am to LSUFanHouston
quote:No.
Does insurance violate the basic laws of economics?
quote:That's missing the point. The reduction of financial risk is the value being purchased. Not the payout.
However, when it comes to insurance, a customer pays money to a company in exchange for a good or service, but the company does everything in their power to avoid having to actually provide the good or service.
quote:Binary thinking. Insurance purchases and pricing are based on risk--which runs between 0 < risk < 100%.
Furhter, outside of top-side limits, no one, the customer nor the company, knows at the time the price is charged, if they will have to provide anything or what the cost of that will be.
quote:Nothing better when people point to government intervention then blame "economics" or "capitalism" for high prices.
But if the basic laws of economics don't apply to insurance, then is a "free market" solution the correct one?
Indeed, when the government steps in and sets prices NOT based on risk (the product)... that certainly decouple the product from the marketplace. But that's not "insurance's" fault, nor the "free market's" fault. That's government's fault. Posted on 3/1/24 at 10:12 am to Chad504boy
quote:
Maybe read your fine print of insurance policies before you assume insurance policies are going to pay out for any and every
I'm not sure what that has to do with the topic at hand. But let's assume you do read your policy and know exactly what it will cover and not cover.
Posted on 3/1/24 at 10:14 am to LSUFanHouston
Assuming that would completely invalidate your argument.
Posted on 3/1/24 at 10:15 am to LSUFanHouston
Politicians have thrown around buzzwords and overly simplistic one-size fits all theories for years. The reality is, we live in a world full of nuances. Insurance rests on the fact that when something happens where you need it, it will be there. Even with regulations, many of the companies still make it extremely difficult to get paid. Think that speaks for itself.
Posted on 3/1/24 at 10:18 am to Taxing Authority
quote:
That's missing the point. The reduction of financial risk is the value being purchased. Not the payout.
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.
The value of a policy is in the fact that it provides the stated benefit when the conditions are met to access that benefit.
I guess there is the ole "sleep better at night" benefit... but even that goes away when the purchase is "required"
quote:
Binary thinking. Insurance purchases and pricing are based on risk--which runs between 0 < risk < 100%.
Completely correct. And I think the biggest problem with the Louisiana insurance market, especially relative to home insurance, is that everyone is having difficulty figuring out where the "x" lies between 0 and 100.
Now you are getting into acutarial science as well as the unpredictable forces of nature, none of which are economic issues.
Posted on 3/1/24 at 10:19 am to DCtiger1
quote:
Assuming that would completely invalidate your argument.
Not at all.
My argument isn't about the ignorance of benefit knowledge.
My argument is that the basic theories of economics don't apply here.
Sure seems like insurnace, more than any other product or services, ends up being litigated for "non-performance".
Posted on 3/1/24 at 10:21 am to LSUFanHouston
The LA commissioner is correct.
Regulatory capture is the only reason that insurance costs to the consumer often don't match the actuarial risk ...
Ie car insurance pricing isn't based on driving performance, actual driven miles/ amount driving, etc ... the number one factor in pricing insurance is credit score ... which is correlative to risk of payment, not risk of accident ...
Same goes for health insurance ...
I could write a novel on this as I was working on a startup that would have reinvented insurance as we know it for everything ... but regulations never allowed us to get our models approved for implementation as insurance companies and lobbyists defeated our approach through legislation and bullshite regulations ... even though our models more accurately assessed and priced actual risk ...
Nevermind the socialist tendencies of existing insurance solutions (ie group assessment Vs individual risk profiles) ...
It's all a scam ...
Regulatory capture is the only reason that insurance costs to the consumer often don't match the actuarial risk ...
Ie car insurance pricing isn't based on driving performance, actual driven miles/ amount driving, etc ... the number one factor in pricing insurance is credit score ... which is correlative to risk of payment, not risk of accident ...
Same goes for health insurance ...
I could write a novel on this as I was working on a startup that would have reinvented insurance as we know it for everything ... but regulations never allowed us to get our models approved for implementation as insurance companies and lobbyists defeated our approach through legislation and bullshite regulations ... even though our models more accurately assessed and priced actual risk ...
Nevermind the socialist tendencies of existing insurance solutions (ie group assessment Vs individual risk profiles) ...
It's all a scam ...
Posted on 3/1/24 at 10:22 am to LSUFanHouston
quote:
but the company does everything in their power to avoid having to actually provide the good or service.
100% untrue .. stop listening to what the billboard lawyers tell you..
quote:
Further, in certain instances, the purchase of insurance product is required by government (such as auto insurance if you want to drive) or as a condition of another financial transaction (getting a mortgage to buy a house).
Yes, because typically a 3rd party ie: a financial institution has a interest in said property. So, in the event that property is rendered valueless do to destruction that party in which loaned money for said property would like to be made whole.. This is not a hard concept really.. Liability is the only thing that is truly mandatory because most people operating these 2 tons missiles loaded with gas don't have the funds to cover most frick ups.
quote:
The current LA insurance commissioner seems to be taking the position that if we remove some government regulation, then free market ecomomics will prevail, more supply will enter the market (more companies offering more polices) and the rules of supply and demand dictate that costs to purchasers should fall (much like the more companies making 60 in televisions, the cheaper a 60 in television will be).
Yes, hopefully we'll get some movement on certain things and make La a little more hospitable to companies thinking of doing business here . La's problem is and always has been two things.. Dumbfricks behind the wheel and Trial lawyers making the rules..
Posted on 3/1/24 at 10:24 am to LSUFanHouston
Government mandated, yes. Insurance itself no, they provide a service. While the pushback is frustrating, I've dealt with enough third parties and lawyers in my life to know what there is constant pushback for those industries as well.
Posted on 3/1/24 at 10:25 am to LSUFanHouston
quote:
My argument is that the basic theories of economics don't apply here.
The only reason economic theory doesn't apply is regulation and social good policies that distorts actuarial risk profiles at the individual level ...
In reality, your health insurance, your car insurance, all insurance should be priced at the individual risk level ... but it isn't ... partially due to outdated, lazy actuary modeling but mostly due to the reasons I explained above ...
Posted on 3/1/24 at 10:31 am to AmishSamurai
Auto Insurance companies have the ability to price on an individual level via telematics, but the majority of the population doesn’t actually want that. They don’t want to be “tracked” when in reality that is the only way to match price to risk
Posted on 3/1/24 at 10:33 am to LSUFanHouston
Because no one talks about the tens on millions of claims that are paid out with zero issue. The largest Home insurer paid out 13 billion in claims in 2023. Your notion of non performance is a fallacy based on biase.
Posted on 3/1/24 at 10:39 am to DCtiger1
quote:
Auto Insurance companies have the ability to price on an individual level via telematics, but the majority of the population doesn’t actually want that. They don’t want to be “tracked” when in reality that is the only way to match price to risk
Actually, I know a lot about the industry. State Farm, Progressive, etc claim discounts on telematics but that is still bullshite as their models use credit score as #1 contributing variable in pricing ... and if you don't drive, the discounts are marginally applied ... I use State Farm telematics in two of my vehicles and the discounts aren't aligned to risk ... trust me, I've priced it out ...
Consumers would be more open to telematics if they could trust the companies collecting the data ... but none of the existing insurance companies are trustworthy in that regard.
I'm going to dump State Farm telematics cause they're selling my data ... already confirmed with marketing spam that I've never signed up for ...
Posted on 3/1/24 at 10:41 am to LSUFanHouston
Did you know insurance companies have to buy insurance called reinsurance to protect them from high claim rates? And the reinsurance product is bought and sold by insurance companies; who also need reinsurance.
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