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April 2017 Policy Study, Number 17-8


A Commentary on American Public Policy


Part 16



The preceding paragraphs were not merely thrown in for confusion or for the doubt which they might create in your mind.  It is to show that there are real costs and benefits associated with choosing either course of action and also to show that it can be legitimate to choose either alternative.  When we encounter such a choice, it is imperative that we are fully aware of the costs and benefits associated with the alternatives in order to make the correct choice for us.  I dare not go on much further, for by now you are undoubtedly a little upset with me for wasting your time with such rudimentary prattle.  It is not the author’s intent to underestimate your acumen with regard to the subject of insurance, but rather to fix firmly in your mind what he believes to be the true objective of insurance.  The true objective of insurance should be to transfer an unknown personal risk with its associated unknown timing to others through a known and manageable payment with certain timing.


As we shall shortly see, not everyone shares this opinion of the purpose for insurance.  There are alternative outlooks on the subject, which are, shall we say, somewhat more encompassing.  The traditional concept of insurance held that we were reimbursed for our actual loss. You purchased insurance with the hope that you never needed to collect.  Why?  Because you understood that your reimbursement would cover no more than your actual loss, and you would still be out the inconvenience, if nothing else.  Further, the loss intended to be covered was of a catastrophic or, at least, an extraordinary nature.  It was also a loss, the timing of which could not reasonably be predicted.  Presently, there seems to be a multitude of people who disregard any such criteria and, at the same time, apparently believe they can actually come out ahead on insurance.


A quick look at the current usage of group medical insurance should illustrate the point.  Using the short list of criteria found in the previous paragraph, a broken leg would legitimately be covered under the traditional concept of insurance.  But don’t we press our insurance coverage beyond this?  It has come to the point that we want our bandages and antibiotics for a scraped knee to be covered also.  Compared to a broken leg, this is a relatively common occurrence.  It isn’t extraordinary as it happens all the time, and, for all practical purposes, it is common and therefore foreseeable.  In other words, one is not insuring risk at all.  He is attempting to insure against the common, everyday events of life.  You can do this, but using an insurance company to pay your bills will cost you a good deal more than if you just accepted the responsibility yourself.


If we treated automobile insurance in this manner, we would demand to be reimbursed for tune-ups, oil changes, gas, and probably for replacing the car when it wore out.  These are common, ordinary, everyday expenses.  In fact, we know these expenses are coming due, and we should exercise individual responsibility and prepare to meet the expenses ourselves.  When we do not, we pay even more dearly because the insurance company merely becomes an extremely high-priced bill-paying service.  It works like this.  An insurance company is more than happy to provide any coverage you may desire — for a price.  And just as you can foresee the ordinary, everyday perils of life that relate to your coverage, so can the insurance company.  They fully comprehend that they are not insuring you for a risk, but rather for the costs of the mundane events of everyday life, in this case automobile ownership.  As they are in business to make a profit, and as they are aware that these mundane events are reasonably certain, they build the full cost of those expenses into their premium. 


Under these circumstances, you not only immediately pay the full cost of your future reimbursement to insurance company upfront in the form of a premium, their profit and their costs of handling the claim are also included in that premium.  As stated before, we have come to use them as an extremely high-priced bill-paying service.  This is so, even if we are blissfully unaware of the how or why.  Why would an annual medical examination or having your teeth cleaned be considered in a different category than an oil change or tune-up for your car?  Why would you consider food (your body’s fuel) to be in a different category than gas for your car?  Yes, one is for the well-being of a real, flesh-and-blood person and the other is for the maintenance of an inanimate object; but all of the expenses in question fall outside the category of unforeseeable risk.  They are all mundane, ordinary, knowable, and expected expenses of modern everyday life.


We would never choose to insure the mundane, ordinary, everyday expenses of auto ownership.  We would consider them economically prohibitive, and so they are accepted as the cost of personal transportation.  Why do we choose to insure the mundane, knowable, and expected costs of existence?  One reason would be a lack of understanding of the real economic consequences of our choice.  Would educating people to the fact that there are some things best left uninsured change their behavior?  It is unlikely because there is another factor at work.


People not only fail to recognize the full costs to them; they fully believe that they can transfer a portion of those costs to someone else and thus get back more than they put in.  They expect to gain something from nothing, and it seems not to bother them that even if they were to be successful in this endeavor, it would be at the expense of their neighbor.  The portion they receive over and above what they have put into the pot would have to come from somewhere.  This is the only alternative, unless you believe that the insurance company can spin straw into gold — that the insurance company can actually create something from nothing.  Haven’t we developed a very similar relationship with government?  In a sense, hasn’t government become the insurer of last resort?


It’s true our government was established to be in the insurance business in the sense that it was established to insure our “unalienable rights.”  In the dictionary definition we used above, “insure” means “to secure; to guarantee.”  The Declaration of Independence lists “Life, Liberty, and the Pursuit of Happiness” to be “certain” of these rights.  It continues, “That to secure these rights . . . ”  If you will closely examine these rights and also those that they went on to list in the Bill of Rights in the Constitution, you will find that the rights of which we speak all have at least two things in common.  We, each and every one of us, are already in full possession of those rights named.  And all of those things that government was to secure are intangible, at least in the sense that you cannot deposit them at your local bank for safekeeping, and you can never exhaust them.  This government was instituted to secure for us those intangible rights we already possessed.  It was not instituted to insure to us those tangible things we might yet desire or even need.


We ask for far more insurance from our government than was ever intended.  We ask for financial security in our retirement.  The concept of retirement itself was as yet undreamed of when our nation was born.  We ask for our medical care to be provided.  We ask for our housing to be provided.  We even ask for our daily bread.  And not to put too fine a point on it, there are some among us who mentally conceive of these actions, and vocally speak of these actions, as social insurance to which we have a right.  We have been willingly convinced that all these things are due to us without undue effort on our part “just because” and that they are our “rights.” 


And so it isn’t enough that these things be provided at a subsistence level; they must be provided at an arbitrary minimum standard.  All these things and more are now supposed to be insured through government.  It isn’t impossible that you could insure for these things in the private insurance industry.  In fact, you can.  On the whole, we choose not to insure through private industry because we find the premiums there are based on reality, on market forces, and are higher than we want to pay.  We find it much less expensive to “insure” through government.  We find it so because our personal out-of-pocket expenses are less when we use the agency of government.  But this is false economy because there are horrendous additional costs associated with this means of insurance to which we are seemingly blind.




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