Monday, August 31, 2009

Free Market Insurance = Socialism

I am convinced that most people really don't understand how insurance really works.

The insurance industry needs a large pool of people to pay and pay, to subsidize the minority who collect and collect. "From each according to his ability; To each according to their need." Sounds like free market socialism to me!

Take auto insurance, for example. The majority of us pay, year after year, our auto insurance and rarely make a claim. I have made 3 claims (all relatively small) in 30 years. I have paid way more in premiums over those years than I have collected in claims. I am subsidizing the careless or chronically unlucky minority of drivers who have multiple claims - for far more money. That is how insurance works.

It works for auto and homeowners insurance though - for the most part. Why? Because everyone is required to have insurance. Auto insurance is required by law (in most, if not all, states). Therefore, even if I were inclined to take a chance and go without insurance because I'm a safe driver, I am not allowed to by law. Therefore, the insurance companies are guaranteed a large pool of payers to cover the collectors. Same with homeowner's insurance. The majority of us have a mortgage and are required to have homeowner's insurance. Once again, the insurance companies have a large pool of payers to cover the relatively small number of collectors. And if the collectors become too large a number, they simply deny those folks insurance - like homeowners on the Florida or Gulf coasts.

This is why the insurance lobby likes the proposal to make health insurance mandatory - it increases the pool of relatively healthy payers to cover the more sickly collectors.

Next post: why the free-market insurance wants nothing to do with insuring seniors.

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