Wednesday, August 8, 2012

Insurance V

Thanks for bearing with.

A friend of mine is going through a bad patch--cancer--and I've had to spend more time taking care of things than I would have had, normally.

Business is still extremely touchy, for those of you who are making their first visit here, I live in a town of less than six thousand people. When you live in a rural community, there is great deal of bifurcation socially; those who have elitist views, and those who only want to be left alone. Life is bad enough without having the know-it-alls telling you what to do, or what to believe.

Hope and change is alive in this small town.

If you're an employee, chances are you're a hope and change person. If you have a business in town, chances are you aren't. Under Oregon law, you cannot tell your employees what your political views are, or how the policies of any particular political view may impact your business negatively. So, we can't, under Oregon law, tell the folks who rely upon my business for their livelihood, why the policies that are being advanced by Democrats make it harder for me to provide them with their jobs. Nor, can any Oregon employer.

In Oregon, we do things differently here.

Back to insurance.

Had a comment from Jardinero1. "Say what you will about fractional reserve lending and I may agree with you. But, it's a gross simplification to equate insurance companies with banks." Guilty. And thank you, Mr. Jardinero, for finding the obvious.

The reason why I refer you to the banking rules is to introduce to you one of the realities of insurance; you don't have to have all the cash your insured send you at any given moment. If you have an hundred insured, paying you an hundred a month, against a policy that will pay out one thousand dollars, how many of those payments must you hold? Ten. That thousand dollars. If you have an hundred insured, how likely is it that any of those insured will make a claim upon their insurance?

Face it, the likelihood of calling your insurance company to file a claim is relatively low.

Car insurance?

Higher likelihood.

Flood insurance? Close to nil?

Health insurance?

Well, here's the conundrum.

Health care has a higher degree of dispersion than any other form of insurance. What is the likelihood of your finding yourself in need of medical care? Is it different between 6am and 7pm, or 7pm and 6am? Is it more likely to be found Monday through Friday than Saturday-Sunday? When you're an old guy, finding yourself with a temperature of 102 is less likely to raise an alarm than when you're a 36 year old father, with a child with a temperature of 103. Old guy, 102, spend some time in bed and take fluids. Child? 103? You're going to make a call.

If you don't have a Primary Care Physician, who do you call? I have a Doc. I don't bother him much. He does check his voice-mail, so, if I have a problem, I can reach him within hours of leaving a message. He's a good doc. If you don't have a primary care physician, you are just like the guy whose car is acting up, looking for free advice as to what you should do to get your car working again.

Your probable solution? In an emergency, you're going to end up in the Emergency Room of your local hospital. The most expensive place in the world to deal with a medical problem.

Me? I take my car in every three thousand miles. Care and maintenance for my motor vehicle is fairly inexpensive. But only because, I write the big checks, when needed. The transmission on my car went out. I could have bought a re-built tranny, but my mechanic explained why I should replace my transmission with a new transmission. That was expensive. Not as expensive as a new car, but expensive.

There are different degrees of urgency that you will face as you go through life. If you are broke, and facing the possibility that you won't have a car to drive you to work, take care of the shopping, moving the kids around, finding that you don't have a transmission that works leads you to several alternatives; buying a new POS, repairing the tranny yourself, buying a re-built tranny, or in my case, buying a factory replacement. There is a wide range of possible outcomes based upon your choice.

If you buy a new POS, you've still got the old iron sitting in your front yard, or sitting somewhere. If you are clever, and have the tools and friends with the right equipment, rebuilding isn't necessarily a bad idea. But most shade tree mechanics aren't able to rise to the level of mechanic necessary to pull it off. Buying a factory tranny made sense, since it included all the computer upgrades that were available for the car I own, plus, it renewed the drive train warranty of my car. It was a win/win for me, although it was the most expensive alternative.

Amusingly, I recently received a call from a fellow, looking for information about an after-market automotive warranty plan. You've heard the ads, haven't you? Why pay for fixing your car? Let insurance do it? What the caller had found out is, that attempting to insure your vehicle against the cost of repairs didn't have the success that he had hoped. He was surprised. Drive an older car, and the chances that you'll need repair, a)increase or, b)decrease? You make the call.

What do you think is more likely? As a car gets older will it need an increased amount of repair, or a decreased amount of repair? I don't find it shocking that the coverage for used vehicles is limited. And, in this particular case, the amount spent by the man who called me to provide himself "insurance" would have gone a lone way toward covering his repair costs. Without insurance. Which, it turns out, didn't cover the costs of his repairs. When you buy insurance, what is it that you're buying? Insurance is a form of derivative financing, that offers itself to cover costs when certain conditions are met. From investopedia, "Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes." This is what insurance is. An hedge.

That is, each of us, most of us, are involved in buying derivatives on a daily basis. Without a derivatives market, there would simply be too much risk for any of us to go into business. Not simply to protect us against loss, but to protect us against claims. (F***ing attorneys.) Even if we appropriately conduct ourselves in our business, there is no guarantee that an attorney will attempt to file a tort claim alleging misconduct. When your insurance agent tells you that you are insuring yourself against the unknown, make sure he means what he says. Tortuous claims can kill your business and leave you with nothing more than the skin on your back.  And, we're not yet talking about "health insurance."

When you give your money to an health insurance company, you're buying yourself protection against future harm. The quality of that coverage may differ from policy to policy, from company to company. I've several insurance companies that I work with. Those companies have track records of performance. I would suggest, that most of us never question the reliability of the insurance companies that we give our money. We look for bargains when it comes to insurance. What kind of value do you allow yourself to purchase, when you're sole concern is the cost of that value? Didja ever wonder why there is so much criticism about the coverage one purchases, how that coverage didn't satisfy the purchaser, when it is discovered that the sole determinant of insurance was its cost?

Purchasing insurance, of any type, is an important contract. And you need to see it as a contract, between you and your insurance provider. The quality of your insurance is indeed, related to the quality of the company providing you your insurance. There is a progressive insurance company that advertises a great deal. I would avoid that company at every turn. The cheapest is not the best. That a single insurance company is the largest advertiser in the United States wouldn't be, for me, its greatest benefit.

Why is it that companies are able to offer you "discount" rates? Would you shop for "discount" dentistry? Discount clothes? Discount shoes?

I own two pair of shoes called brouges.  Wingtips. I paid more than two hundred dollars for these pairs of shoes, each, twenty years ago. I still wear them today. Purchasing a thing of value has a worth greater than its cost. Buying quality is important. Buying cheap, or shoddy, is a waste of money. So, too, with insurance.

Purchasing health insurance is similarly worthy of this same type of criticism. Unfortunately, in an attempt to protect us from ourselves, government has stepped in to assure us that we can't purchase the type, kind or quality of insurance that we should be able to purchase for ourselves. Why is insurance so expensive? Because, legislators have told insurance companies that they cannot make rational decisions about the costs of insurance, which would depend upon who purchases said insurance. According to a certain political view, it is unfair for someone in a higher risk pool to pay a higher price for coverage. Once you break price from risk, you increase costs for the lower risk pool, while reducing costs for higher risk pools.

Insurance companies never complained.

Why would they?

Thank about it; when you live in a world where politics determine your costs, as against the costs of your competitors, what disadvantage have you, when mandated costs are created for all participants in the market? Zero.

If you provide a service that has mandates, the mandates have to be viewed as zero costs in terms of competitive advantage. In terms of market forces, it is, of course, insane. But politicians know, that if men could buy insurance from insurance company A, and women could only purchase from insurance company B, that women would pay more for insurance than men.

Government can level the playing field by requiring all insurance carriers to provide certain types of coverage to "all" insured, whether they are male or female. It's simple theft through law. I'm not a woman. But, if I want to purchase health insurance, my coverage will cover the same medical issues, abortion, birth control, pregnancy, mental health, as if I was a woman. Because, politically, it's death to point out that the reality of the world is, it costs more to insure a woman than it does to insure a man.

But women are unwilling to cover the costs of their own healthcare. It's easier for them to claim that their healthcare costs are discriminatory, and therefore are the burden of the entire society of which they belong. This came across my desk a couple of days ago:

"It gives the woman the decision to decide what her family size will be. It gives her control over her life."

What was the topic? Abortion and birth control under the Affordable Care Act.

The government paying for abortion and birth control " the woman the decision to decide what her family size will be. It gives her control over her life."

Think about it.

We have a political class that has determined that women who can't figure out that having sex is the single, greatest determinant of pregnancy, have a right to depend upon their government for dealing with their terminally stupid decision to have unprotected sex is a form of "control over her life"?  Are you serious? Do you view a woman's ability to abort a child with the same level of intellectual clarity when one is suggesting taking the life of an unborn child? If a woman was actually able to decide what her family's size would, or should, be, or wanted to gain control over her life, wouldn't one of her first decisions be, whether or not to procreate? To fuck? To make babies?

Insurance companies don't care. They are in on the fix. Cost controls? Check. Limits to care? Check. Free abortions and birth control? Check.

How does all this come about, without interference? Most people don't know where insurance companies make their money. And, most people don't know that the regulations over insurance companies really don't have anything to do with how they make their money, or how their costs are allocated.

Hopefully, I can wrap this damn thing up after another post. But, getting back to the comment of Jardinero at the top; yes, it was a simplification to compare fractional reserves in banking to the reserve components of the insurance industry. But, Mr. Jardinero, can you tell me why the insurance industry is an even more wild card in finance?

Next time.

1 comment:

MAX Redline said...

Good luck to your friend.

Insurance is odd. If I buy a car and drive it on my own property, a la Dubya on the ranch, I'm not obligated to have it licensed, registered, nor insured. All come into play if I take it onto a public road - yet I can choose to buy liability only, or comprehensive coverage with a range of deductibles.

Health insurance, not so much - you're obligated to pay for services that you'll never use, thanks to government interference.

I have friends who have purchased another form of insurance - the "extended warranty" on electronics. Why would anybody do that? If electronics are going to fail, they will do so within the first year - under OEM warranty.

You can purchase several new dvd players for the cost of an extended warranty. Computers cost more, yes - but what's most likely to crap out? A $50 power supply, which I can purchase and install for far less than the insurance would cost.

I'm sure that at some point, government will require EW purchases.