Insurance

Insurance is a wise thing to have.

I have insurance on my house, through a home owner's policy, on my car, through an automotive policy, on my employees, through a Worker's Compensation policy, and my business, through a commercial policy.

The contents of my house are either covered by my home owner's policy, or by my commercial policy. It's amazing to me that I'm able to cover my business, my employees, my home, my automobile against claims in the millions of dollars, for a few thousand dollars each year. There's only one form of insurance that I can't afford; health care insurance.

Why is that?

My home owner's policy is defined by the value of the structure. If my home were to be blown down, burned down, driven though by an four-by-four, the value of the structure itself would determine the cost to replace the entire structure. (Be careful, and make sure you purchase replacement cost insurance.)

Both the insurance company and I have a good idea of the value of the structure. Given the size of the structure, it would be easy to estimate accurately the replacement cost of that structure. And given the chance that I'll either see this home blown down, burned down, or driven through by an four-by-four vehicle, the chances that this home will be destroyed are fairly remote. I have had wind-storm damage, and it was expensive. Not at all equal to the cost of the entire structure, but expensive, nonetheless.

Burned down, the costs would be higher, since the insurance policy I have doesn't cover the structure alone, but to a certain extent, the contents--my personal property versus the real estate property--contained in the structure. My home owner's policy wouldn't pick up the entire cost of the loss of property inside the building, since I also operate a business inside the same structure. At that point, my commercial insurance steps up to provide against loss for the equipment housed in my home, but owned by my corporation. And I think it would be fair to say, that the value of the commercial equipment in my home is at least as valuable as the structure, and my personal property.

My automotive insurance isn't expensive because I drive an expensive vehicle. It's expensive because of the protection I need to have, should I get involved in an accident. I need to have enough insurance that if I'm involved in an accident, that insurance is significant enough, to allow me to hold my company from being held hostage in any lawsuit arising from such an accident. If you carry the "minimums" required by law, you'll have a lower insurance cost. But if you have an insurance policy that seeks to indemnify your holdings from suit, you'll need to pay significantly more for adequate driver's insurance. And my advice is, to always have a bit more insurance that the total value of your assets. Yes, it is more expensive. But accidents and attorneys present a one-time cost that you'd not be able to recover from.

Likewise, my commercial policy covers more than the minimums that some might feel sufficient to cover the risks of conducting a business. By contract, some of the companies I do business require me to have at least two-million dollars worth of liability coverage, in order for me to do business with them. I'm not alone. There are small-business owners all over the place, facing the same costs, simply to endeavour to conduct themselves in their business activity. From donuts to table-tops, the people who provide the services and products that an economy demands, requires small- and large-business owners to provide assurances that if tragedy strikes, compensation will not be halted due to the cash-flow problems of the individuals affected by such tragedies. My two-million dollar coverage is by no means the limit of coverage requirements, simply the "first notch," in many cases. As businesses grow, as the amount of exposure increases, insurance assurances climb in amounts--and price--into millions of dollars for single projects or companies.

Fortunately, economic risks and costs have been present, and insurable, for hundreds of years. Some of the earliest forms of insurance were related to mercantile trade, as companies, notably Lloyd's of London were formed, and laws were passed, such as the British law that required certain coverage for sailors, in the 17th and 18th centuries. ( From memory, if earlier examples exists, please append.)

Point is, what the ship owners realised, and the British government, in terms of sailors, realised, was that there was a need to indemnify individuals from tragical outcomes. A ship at sea, going down with all hands, would not end up well. To assure the families of the men who travelled on ships of indemnification against loss resulted in what we know of as, today, insurance. Assure, insure, indemnify. These are the terms covered by insurance policies. And shipowners were required by law to indemnify their sailors' families from the loss of any sailor's life. Which I think presents itself as an interesting argument, given the current political conversation on the requirements of health care insurance. (Presented as a quibble, not in good faith.)

The key to all of the above insurances mentioned--with the exception of medical insurance--is that there are clearly defined limits. And, all these forms of insurance--with the exception of medical insurance--can be defined clearly by limits and coverage. An English sailor's life in 1790 might have been deemed worth five-thousand pounds. Or, two-thousand pounds. Whatever.

And that "whatever" is important. Whatever an able-bodied seaman was worth, the owner of the shipping line was required to pay the sailor's family if he lost his life while serving as a merchant mariner. It's the same type of thing you see if you buy accidental death and dismemberment insurance. You get a table that tells you a finger is worth five-thousand dollars, a foot is worth ten-thousand dollars, and maybe an arm is worth 15-thousand dollars. I remember seeing one of these charts when I first purchased insurance around forty years ago, and wondered what limbs and digits I'd be willing to cash in to create a reasonabl investment pool?

Insurance was a fairly easy product to purchase, and fairly easy to evaluate, in terms of whether or not the protection offered was worth the potential value of claims that could arise. Given the condition of ship and crew, the reputation of the Captain, merchant vessel insurance was priced to attract the purchase of the insurance, pooling the potential losses of a single vessel against the pooled losses of all insured vessels.

Insurance companies used low subscription rates to induce the purchase of insurance. But that wasn't where insurance companies made their money. A thousand ships, each a thousand dollars. A thousand thousand is how much? In cash. And that money was never let lie idly. Under a concept that is known as "fractional reserves," the balance was put into investments. To the degree with which an insurance company is, or was, successful in its investments, the costs of insurance were either raised, or lowered.

Insurance companies with successful portfolios were able to provide lower insurance costs than insurance companies with less successful portfolios. Same coverage, lower costs.

How does this apply to the questions we're facing when it comes to health insurance?

Perhaps the question should center around the types of legislation that have occurred since the 18th century. How does regulation drive up costs? And lower benefits to insurance subscribers? For me, its obvious. For a later post.