The Ignorance of Insurance Bashers
It seems that these days newspapers will contain, with great frequency, a letter or article that bashes the insurance industry. These are no doubt generated by the current debate and dilemma over health insurance – its lack of access and cost. It appears that the authors of such commentary see the insurance companies, all insurance companies, as being managed by and staffed with greedy, sadistic and malicious individuals. In doing so these authors prove only one thing; that they know absolutely nothing about the insurance industry.
Insurance is very complex and surely one of the least understood of business ventures. Space doesn’t permit for an adequate description of how insurance companies operate and the challenges they face. For one thing, and excepting life insurance, it is the only business there is in which its managers do not know the cost of their “product”. That’s right, they produce a product which is a contract that promises to do something in the future that may or may not happen and if and when it does, they don’t know how much it will cost them. As a consequence it is virtually impossible for them to make a “profit” as most people think of that term. As a matter of fact the health insurance industry and, even more so, the property and casualty insurers, make smaller profits than almost all other business ventures. Why is that? Because they are required to put most of the income they earn that may exceed their cost of operations and the claims they pay and put it into reserves that will be needed for future claims.
The application of actuarial science may give them some help in determining what that future cost may be thereby establishing the premiums they need to charge but an error made in that process or a catastrophe or major shift in tort law or in market practices may spell disaster. Few people are aware that there were 700 insurance company failures in the U.S. since 1970, with 400 occurring between 1984 and 1998. These failures continue to this day. Just recently the Atlantic Mutual Insurance Company, a large property/casualty insurer in business since 1842 was liquidated by the N.Y. Insurance Department. The cause of their failures is almost always their not setting aside enough in reserves which, in turn, was caused through their inability in obtaining sufficient premium income.
Another peculiarity of the insurance industry that is rarely understood - every other business requires customers and spends large sums of money getting them. You will have to agree that to do a viable business of any nature you want, indeed need, customers. So, why do insurance companies refuse customers? Whether they do it individually or en masse, they will at times refuse to insure someone or something (a driver, a home, someone in need of health insurance) for the simple reason - they must. If they don’t they are subject to fail. Do you really think that a company like State Farm liked non-renewing all their Florida homeowners insurance policies? Do you think they didn’t know they would make thousands of customers mad or do financial damage to hundreds of their agents? A doctor recently told me he felt that an insurance company should not be allowed to refuse insuring someone with a preexisting condition. I asked him to answer me honestly, “If a person came to you for an appointment and you found out through some means that he had brought a number of malpractice suits against his former doctors, would you take him as a new patient?” Of course he wouldn’t. One of the first things a property insurance underwriter learns is that he or she cannot, ever, insure a burning house.
There are methods to make available insurance for special “risks” but they require special arrangements outside of the normal insurance market; and are expensive. And there are systems that can be established that will combine commercial insurance with or without government fiat to accept high risks. All nuclear power plants in the world are insured by the commercial insurance industry as are all satellite launches done by private industry. Automobile drivers who cannot get insurance otherwise can, in many states, find coverage in assigned risk plans and businesses with dangerous operations can turn to Workers Compensation Insurance Pools. Similar solutions can be found for health and homeowners insurance. Just keep in mind, where risks are high, so will there be a high cost. The only other alternative is to have the government provide the insurance at no cost or insufficient cost to the insured and pass their expense to do so on to you and I, whether we want it or not.
Then there is the matter of insurance company regulation. Many have complained that the insurance companies are not sufficiently regulated. A company that does business in all of the U.S. is subject to fifty regulators. Each state’s insurance department is looking at what they are doing – in detail. All their activities are transparent, their financial status, the products they sell, the rates they charge, complaints made against them, their reserving practices; all are under constant review and subject to timely audits.
One recent letter to the editor of a newspaper contained the comment, “I would like to do away with the insurance business entirely. Insurance is involved in everything.”
He should be thankful it is because if we were to follow that advice the successful conduct of just about all business transactions would come to a halt. We need insurance for our automobiles, our homes, our liability to others, for disabilities and accidents, burglary and theft, for aircraft, boats, motorcycles; for loss of our personal effects, for credit cards, for hospital and doctor bills and prescriptions, mortgage insurance so we can own property, title insurance; just to name a few. Businesses need to protect themselves from their liability for their operations, the contracts they enter into, the products they make and the results of the work they do, injuries to their employees, surety and fidelity exposures, business interruptions, shipping and transportation, the list is endless. Ever since the Phoenicians invented insurance circa 500 B.C., it is the oil that keeps the affairs of man running smoothly.