October 30, 2013
Most people take a dim view of insurance as a necessary evil tantamount to gambling. I will admit that was my view prior to starting my engineering career with a property insurance company. My view was slow to change at first, but the more I learned about insurance the more I could see the benefits that enabled greater prosperity. Vast amounts of capital that may have been held in reserve by a business owner to rebuild factories were freed for expansion, improvements, research and development in exchange for a relatively small premium. Property insurance companies were also strong advocates and innovators of property protection to keep insurance costs low. The economies of scale we benefit from today would not be possible without property insurance and protection. The social good done by property insurance companies to conserve resources and coincidentally save lives is undeniable. The insurance policy itself saw innovations, offering all risk coverage as an alternative to named peril policies, variable deductibles and negotiable limits. How this compares to health insurance is the topic I will explore.
While there are many parallels between property and health insurance, there are also tremendous differences. The entire realm of social insurance has lacked innovation primarily because of government interference. Social Security, Medicare, Workers Compensation, unemployment and certain aspects of automobile liability insurance are all related as social insurance without free market benefits. Government exercises either monopolistic or regulatory control with significant cost overhead and anti-competitive influence. Can you imagine where our economy would be today if the vast sums poured into Social Security to finance government spending had been available for investment in the private sector? While there is a free market for pension plans, it is tightly regulated and a mere fraction of what it could be if Social Security taxes were available for private investment.
Consider the various types of social insurance available in the free market. Life insurance, accidental death insurance, annuities, health insurance, travel insurance, disability insurance and the list goes on but all for narrow purposes. We insure ourselves and our dependents against the burdens of death, illness, injury and loss of income. These insurances provide for healthcare when we are ill or injured, income when we are disabled, bury us when we die and provide for our dependents when we depart this life. The common thread is quality of life for our dependents and us. What would a Quality of Life (QOL) policy look like and how would it work?
A QOL policy would be funded by premiums and include a savings and investment element. This would enable the policy to follow the person. Does it matter to any individual whether they are injured at work, home or while traveling or do they simply want to know that medical services, subject to a deductible would be paid by the policy? Does it matter to anyone whether they lose their income from illness, injury, disability or unemployment or is it more important that they have a dependable source of income? Many large companies today hire temporary workers to avoid the costs of benefits such as health insurance and unemployment insurance. How many people would be permanent employees if these costs were eliminated and coverage was available on a personal basis? If parents had the option to purchase such policies for infants, would there not be an incentive to carry such policies for life? They would have value, could be swapped and modified as individual circumstances change. A comprehensive "all risk" QOL policy would simplify claims processing and settlements. The underwriting would be difficult but not beyond the ability of innovative and competitive insurance companies. These companies would certainly be more attuned to reducing costs and eliminating fraud than any government program. Competition may also lead to specialized reinsurance to assure customers the lowest costs.
Health insurance fits well into a QOL policy strategy. Bundling various coverages into a QOL policy enables an economy of scale and reduced administrative burden. The incentive and ability to purchase such policies at a young age would enhance their value as the savings and investments grow. That would also make pre-existing conditions a non-concern for most purchasers. Can't pay your premiums because you lost your job? Not a problem with the unemployment coverage bundled in the policy. What about retirement? The QOL savings and investment features would produce more income for retirement than the Social Security pay and tax as you go scheme.
What stops the pursuit of QOL policies is the myriad of laws mandating and regulating insurance. No company is going to invest the genius required to develop a product such as QOL insurance when the stubbornness of government stands in opposition. Workers compensation for example, would require a significant examination of underlying principles, particularly regarding liability. Private companies have done a marvelous job despite government interference, particularly regarding rehabilitation and return to work. How much better could they do if government regulations were replaced by concerns for consumer demand? There is a role for government and it is the traditional role of adjudication of disputes and prosecution for fraud, not tampering with and distorting the free market.
QOL insurance is just an idea at this time in an industry where ideas are crushed by the weight of law, regulations and anti-competitive favoritism in government. Reforms that are required are not to do something but to undo the damage done by government. The free market and capitalism have made us a wealthy nation but are being undermined by government. Isn't it time to let the free market do what it does best and give people what they want, not what government dictates that they need?
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