re: Does insurance violate the basic laws of economics?

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

Please explain…all of the lawyers and the blame game would be removed

Bingo

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.

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

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This is similar to saying people got screwed by their mortgage company because they didn’t know their rate would adjust

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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.

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.

At least it's not a fricking Owlfan thread

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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.

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I hate insurance companies just as much as everyone else, but what would you propose we replace mandatory liability auto insurance with?

You want more retards driving around uninsured?

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No, “owning” things people can’t afford is what creates the need for insurance.

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Lol
Simplistic thoughts sound great usually.

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n reality, your health insurance, your car insurance, all insurance should be priced at the individual risk leve

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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.