|
Home / Finance / Insurance
Auto Insurance Principles Should Apply To Health Insurance
By:Melih Oztalay
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
Digg
del.icio.us
Blink
Stumble
Spurl
Reddit
Netscape
Furl
Article keywords: precedent, health insurance texas, affordable health insurance texas, health insurance dallas, health in
Article Source: http://www.articles2k.com
Melih ("may-lee") Oztalay, CEO
SmartFinds Internet Marketing
Web: www.precedent.com
EMail: melih@hsfideas.com
Precedent - Health Insurance For The Rest Of Us
|
|
| Top Insurance Articles |
- 1). Growing Old By : Joseph Kenny
There are a couple of things in life that we know, at some stage, we will be worried about. Growing old certainly seems to be one of them. More and more, our culture is becoming obsessed by the cult of youth. Not only are film stars and musicians young and beautiful, but increasingly, politicians and newsreaders are getting younger also. Add to this.
|
- 2). Health Care Eligibility For Unauthorized Migrants - Moral & Practical Implications By : Erin Shaughnessy
Various organizations and government officials have cited estimates for the number of illegal immigrants at between eight and twenty million. With rising health care costs as a major issue for most Americans, this article considers the moral and practical issues of providing medical care for uninsured immigrants.
According to a research report entitled “The Size and Characteristics of the Unauthorized Migrant Population in the U.
|
- 3). Determining How Much Life Insurance You Need By : Stephen L. Nelson, CPA
When considering life insurance, you’re planning and preparing for an event most of us would rather not think about. But life insurance represents a critical step in managing your personal finances and ensuring your family’s well-being.
The Two Approaches to Life Insurance
You can use one of two approaches to estimate how much life insurance you should buy: the needs approach or the replacement-income approach.
|
- 4). Can Car Insurance Be Affected By Your Bad Credit History? By : Joseph Kenny
If you have bad credit you can be denied car insurance! The protections afforded to the consumer since the Depression of 1929 no longer exist. The Financial Laws passed through Congress in 1992 allowed banks, insurance companies, investment firms to handle banking, insurance and investment operations. Laws passed after 1929 had prevented banks from.
|
- 5). How to Get Cheap Auto Insurance on the Internet By : Heather Colman
If you have a connection to the Internet and a computer you can easily find cheap auto insurance. With more and more businesses turning to the Internet to service their customers and increase sales, it's no wonder you see an insurance man on every virtual corner.
Not only are most of the major companies online today they now provide insurance quotes and the ability to buy your policy right from their websites.
|
- 6). Gap Insurance: A Financial Safety Belt By : Peter Garant
Why is gap insurance considered as a financial safety belt? Simply put, it keeps you from being financially ruined when disaster hits your car. For example you are in this situation, you bought a late-model car three months ago using a car loan with a regular car insurance. The car costs $30,000 and you have already made three payments of $900 each month.
|
- 7). Eight Rules for Saving Money When You Buy Insurance By : Stephen L. Nelson, CPA
By following the eight rules explained here, you can save money, and just as important, you can save yourself from making serious mistakes when you shop for and acquire insurance policies.
Rule 1: Buy Insurance Only for Financial Risks You Can’t Afford to Bear on Your Own
The purpose of insurance is to cover catastrophes that would devastate you or your family.
|
- 8). Critical Illness Insurance The Non-Disclosure Problem By : Michael Challiner
If you're in the unfortunate position of having to make a claim on your critical illness insurance policy, the last thing you want is insensitive hassle or apparent non co-operation from your insurer. But according to numerous newspaper articles, that's precisely what's happening. The core problem is that before they'll pay out, the insurer will always want to make exhaustive enquiries about your past health record.
|
- 9). Pssst - Want To Know A Secret That Banks & Car Insurance Companies Don't Share With You By : Tom OLeary
Every single driver in the U.S. is required to have Car Insurance. And most of drive around confident that we have adequate coverage to protect us should we ever be involved in an accident.
Yet, almost 97% of all drivers are not adequately protected...and don't even know it. Here's what I mean.
Let's say you're involved in an accident and it's serious enough that the car is considered a "total loss" by your Insurance Company.
|
- 10). Life Insurance & Why It’s Important For Your Family By : Daphne Succes
It’s sad to think about, but life insurance is something that everyone needs to consider. In the event of an unfortunate loss, an individual often wants to have the peace of mind in knowing that his/her family will be financially secure.
Life insurance can be obtained in a number of ways, including from a national insurance provider, various credit cards and/or certain employers.
|
| New Insurance Articles |
|
|
|
|
|
|
|
|
|
|
- 6). When To Consider Selling Your Life Insurance Policy? By : Paul Sherman
A Life Insurance Policy is a personal property, like a house, car, antiques, old painting or stocks and bonds. You can sell your life insurance policy like you sell your other personal property items. Life insurance may now be viewed as a traditional asset that can be purchased or sold. Sale of Life insurance policy is called as Life insurance settlement, Life settlement or Senior settlement.
|
- 7). Life Insurance, A Great Investment Opportunity By : Mika Hamilton
Insurance is often the safe and most risk free approach to investment. Most people think they are sufficiently insured when they are not. Hardworking people spend a lifetime earning what they have. Our personal wealth is a coupling of family and our income early potential.
|
- 8). All About Home Insurance Leads By : Oliver Turner
After loads of man-made and natural calamities in USA the Home Insurance market has come much into prominence. And at present the competition is at its peak.
Homeowners Insurance is a guarantee, which pays the cost of your house if it gets damaged in some natural or manmade disasters like fire, floods, storms etc.
To get a good home insurance quote we often turn to agents.
|
- 9). Health insurance plans By : Janani
Health Insurance:
Health insurance, which is coverage for individuals to protect them against medical costs and give them a surity to a secured life in this unsecured world with day to day accidents, enormous infections and diseases which may be highly fatal such as Tuberculosis and other viral infections, Genetic disorders that requires relatively high costs for treatment and diagnosis.
|
- 10). Life Insurance Online By : Robert Lawrence
There are many types of life insurance policies. Before you venture out for one, learn about them and see which one is applicable to your needs best. The following are the most common ones:
1. Term life insurance: This type of insurance is the most basic of all. Its one and only function is to cover your life with an amount of cash which on even of your death will be given to your nominee.
|
|
|
