7 ms·

(US perspective) I've wondered if for-profit insurance as we know it can survive changes in advances in actuarial science & related fields. As I understand it,

(US perspective) I've wondered if for-profit insurance as we know it can survive changes in advances in actuarial science & related fields. As I understand it, the entire concept of insurance is based around gathering relatively large groups of people with a solid understanding of their average risks for certain types of loss. Given the averages hold accurate over time, those that need a payout can get one, and the insurance company makes money in aggregate. However, the better the insurance companies can understand our risk profiles as individuals (going well beyond age/sex/smoking/etc/etc/etc) - eventually (in theory) a motivated insurance company is going to be able to determine that I have a 90% chance of developing Serious Syndrome X while you have a 97% chance of developing Minor Issue Y. Today we might get put into the risk pool. But as the science advances, the risk pools can be cut into finer and finer (and more accurate) risk pools. Why should a profit-seeking insurance company insure me past some point when the data strongly indicates i'm going to need drastic and expensive intervention. It seems like the three ways to avoid this are: 1. "Advances" like the one mentioned here don't turn out to have enough predictive power and insurance continues to operate much as before 2. Some people just can't get for-profit insurance, at least not for health coverage (I'd think accidents will always remain much harder to predict than e.g. heart disease). Pushing them into some kind of not-for-profit 3. Regulation forces blinders on to underwriters essentially saying "actuarial science advances to here and no further"

klodolph 8y ago
I don't think that's how risk pools work in the first place. The idea is not to put people with similar levels of risk in the same pool. The idea is to make the pool as large as possible, charge everyone for their expected cost + a margin, and then pay out everyone for their actual costs. It's the law of large numbers at work here. Take the mean value of a large number of variables with high variance and you end up with a mean that has low variance. Not only is it normal for people with condition X to be in the same pool as condition Y, but this is a good thing because the costs for people with condition X are less correlated with the costs for people with condition Y, and this reduces risk in the pool. For example, if you have a pool that only contains people with condition X, and then it turns out that a commonly used medication prescribed for condition X has horrible side effects, then that single problem is disastrous for the entire pool. > Why should a profit-seeking insurance company insure me past some point when the data strongly indicates i'm going to need drastic and expensive intervention. Because you pass laws that make it illegal for insurance companies to deny coverage on this basis, and then you turn around and pass laws to keep the pool healthy enough for insurance to still be profitable. Or you just nationalize it.
- throwawaymath 8y ago
  Isn't what you describe in the first three paragraphs of your comment the same system as what the person you're replying to outlined in their first paragraph? It seems to me like you stated you don't think the parent commenter's outline of risk pools is accurate, but then went on to describe the same system. How is it different? Both of you are talking about risk pools consisting of large groups of people with different risk profiles for different healthcare liabilities. The commenter you replied to seems to be talking about this concept breaking down as insurance companies increasingly slice risk pools down such that their profit depends less on understanding the mean and more on predicting the future. That being said, your last point sounds like a decent proposal for how to combat this problem. I'm not sure if it would work in practice, however, as healthcare legislation seems to be hotly contested on all sides.
- LeifCarrotson 8y ago
  > The idea is not to put people with similar levels of risk in the same pool. The idea is to make the pool as large as possible, charge everyone for their expected cost + a margin... As a consumer who is fortunate enough to get life insurance at the "Super Preferred" low-risk rate, I would prefer be in a small pool that excludes people with higher actual costs. That's an economic preference, not moral, though my morals are not bothered by using the system as designed. As long as insurance companies are free to offer plans that admit only really healthy people and exclude people with higher actual costs, my plan will be cheaper. Really healthy people will drop out of the larger pool and into the cheaper pool. The larger pool will, as a result, get more expensive. And the people remaining in what's effectively the shallow end of the pool will be offered a "Preferred" rate that's more expensive than super preferred but less than the large pool. Eventually you end up with small risk pools, with the least insurable, highest-risk and highest actual cost customers unable to buy affordable life insurance. If you're a 20-year-old obese diabetic who smokes and has a family history of cancer, and the actuarial table says there's a 50% chance that your 50-year $1M policy will have to pay out, your premiums before a margin are 1M * 50% / 50 / 12 = $833/month. That's not really affordable, even if it would be wise for our unhealthy friend if he or she has dependents. My super-preferred policy costs me $21.25/month. I empathize with the plight of the uninsurable. Given my voting history on health insurance issues, I would probably vote in favor of a law that limited segmentation and would bump my premiums to, say $50/mo and would offer life insurance to the $833/mo individual at the same rate. But I'm not going to jump from my pool into a more expensive pool by myself if that signal will fall on deaf ears.
Retric 8y ago
Knowing more about risk pools does not change the rate of deaths. So, for everything negative you learn someone else ends up in a more positive light as the overall average does not change. Now, if we find a lot of negative things about one person their premiums might become unaffordable but otherwise it's not a big deal for the industry.
NegativeLatency 8y ago
> Why should a profit-seeking insurance company insure me past some point Seems like a good argument for single payer insurance.
- maxxxxx 8y ago
  I think it's an argument for very large non discriminating risk pools.
  - monocasa 8y ago
    The biggest being one large risk pool that all citizens are a part of.
  - op00to 8y ago
    Seems like a good argument for single payer insurance!
    - maxxxxx 8y ago
      Not necessarily. You can have multiple insurances compete over the whole country.
      - buckminster 8y ago
        And they compete on which can most successfully discriminate without getting caught. What's the point?
        maxxxxx 8y ago
        No discrimination. You take anybody or you are out of the market.
        LargeWu 8y ago
        What is the motive then for a for-profit company to even exist? If every insurance company has to take everybody, that implies they have to also provide the same coverage to everyone at the same rate. Barring cartel-like collusion, which is already illegal, the market price would quickly converge towards the cost of insurance. There would be basically no upside, but almost unlimited downside.
jotm 8y ago
> Why should a profit-seeking insurance company insure me past some point when the data strongly indicates i'm going to need drastic and expensive intervention. They shouldn't.
- james1071 8y ago
  that is why the private sector cannot alone supply medical insurance
iguy 8y ago
In Europe I believe that insurance already may not discriminate on sex: compared to women, men's car insurance got cheaper and retirement annuities got more expensive, when this began. Why wouldn't we just extend this to cover more things? We are free to design what kind of insurance market we wish to have. For-profit companies don't have to be operating in some kind of absolute free-for-all.
- oligopoly 8y ago
  >In Europe I believe that insurance already may not discriminate on sex: compared to women, men's car insurance got cheaper That's false. After EU came meddling insurance was raised for men to the same level women had even though men have statistically lower risk of accident.
  - admax88q 8y ago
    That's odd. Here in North America I believe most insurance companies charge men more than women as they have a higher risk of serious accidents.
    - oligopoly 8y ago
      Could depend on the age group and driving record. In some age groups men can be overly aggressive drivers but overall less accidents compared to women. For the person who downvoted OP was referring to the EU. Previously men paid less but when EU decided statistics are sexist now both pay the same higher amount. Yay for the consumer
      - iguy 8y ago
        Anyone got data? Prices change over time. The best I could do in 5 minutes googling was newspapers complaining that, on average, men still pay more... because they drive (on average) further, in more expensive cars. And rumours that they are setting the rates for different professions as a way to get around the rule... huge differences like this: Dental Nurse Less than 1pc male £840 Solicitor 59pc male £848 Sports and leisure assistants 56pc male £880 Civil engineer 92pc male £910 Social worker 21pc male £920 Plasterer 98pc male £950 I had an idea that retirement annuities etc, which are a much bigger deal, were much more regulated & could only price based on a few numbers. But I don't have a link.
dreamcompiler 8y ago
> Pushing them into some kind of not-for-profit Health (and perhaps life) insurance should be not-for-profit, period. Healthcare providers in general should also be either nonprofit, or they should be mandated to publish their prices and stick to them, so that transparent competition exists in the marketplace.
- pmiller2 8y ago
  I’m not saying I disagree, but what’s your argument that life insurance should be nonprofit?
  - dreamcompiler 8y ago
    Insurance companies that make a profit are strongly incentivized to maximize premiums and find excuses not to pay claims, which is exactly what TFA suggests. Doing these things is exactly what gets you a nice bonus if you're a manager at an insurance company. A non-profit organizational structure removes such personal incentives for customer abuse.
tfehring 8y ago
>As I understand it, the entire concept of insurance is based around gathering relatively large groups of people with a solid understanding of their average risks for certain types of loss. Given the averages hold accurate over time, those that need a payout can get one, and the insurance company makes money in aggregate. >However, the better the insurance companies can understand our risk profiles as individuals (going well beyond age/sex/smoking/etc/etc/etc) - eventually (in theory) a motivated insurance company is going to be able to determine that I have a 90% chance of developing Serious Syndrome X while you have a 97% chance of developing Minor Issue Y. Even as predictive models improve, insurance will always rely on risk pooling. Even if you believe that insurable events like death are completely deterministic, insurers' information will always be imperfect. So models will always have an epsilon (noise) term, which is diversifiable. >Today we might get put into the risk pool. But as the science advances, the risk pools can be cut into finer and finer (and more accurate) risk pools. Why should a profit-seeking insurance company insure me past some point when the data strongly indicates i'm going to need drastic and expensive intervention. Because they will still profit on average if they charge you more than the expected value of claims. Insurers have historically been hesitant to insure high-risk individuals for any price, in part because they're not confident enough in their ability to accurately quantify the risk associated with them. I'd argue that more granular and accurate rating will actually improve high-risk individuals' access to life insurance for that reason. Edited to add: I suspect that the same would be true of health insurers, though that's currently moot in the US due to the ACA. >It seems like the three ways to avoid this are: 1. "Advances" like the one mentioned here don't turn out to have enough predictive power and insurance continues to operate much as before 2. Some people just can't get for-profit insurance, at least not for health coverage (I'd think accidents will always remain much harder to predict than e.g. heart disease). Pushing them into some kind of not-for-profit 3. Regulation forces blinders on to underwriters essentially saying "actuarial science advances to here and no further" The status quo is mostly #1 for life insurance, and I'd contend that it's likely to stay that way for the foreseeable future. Health insurance is squarely in bucket #3 in the US, but who knows how long that will last or where it will go from here. N.B.: I'm a (non-credentialed) life actuary.

klodolph 8y ago

I don't think that's how risk pools work in the first place. The idea is not to put people with similar levels of risk in the same pool. The idea is to make the pool as large as possible, charge everyone for their expected cost + a margin, and then pay out everyone for their actual costs. It's the law of large numbers at work here. Take the mean value of a large number of variables with high variance and you end up with a mean that has low variance. Not only is it normal for people with condition X to be in the same pool as condition Y, but this is a good thing because the costs for people with condition X are less correlated with the costs for people with condition Y, and this reduces risk in the pool. For example, if you have a pool that only contains people with condition X, and then it turns out that a commonly used medication prescribed for condition X has horrible side effects, then that single problem is disastrous for the entire pool. > Why should a profit-seeking insurance company insure me past some point when the data strongly indicates i'm going to need drastic and expensive intervention. Because you pass laws that make it illegal for insurance companies to deny coverage on this basis, and then you turn around and pass laws to keep the pool healthy enough for insurance to still be profitable. Or you just nationalize it.

throwawaymath 8y ago
Isn't what you describe in the first three paragraphs of your comment the same system as what the person you're replying to outlined in their first paragraph? It seems to me like you stated you don't think the parent commenter's outline of risk pools is accurate, but then went on to describe the same system. How is it different? Both of you are talking about risk pools consisting of large groups of people with different risk profiles for different healthcare liabilities. The commenter you replied to seems to be talking about this concept breaking down as insurance companies increasingly slice risk pools down such that their profit depends less on understanding the mean and more on predicting the future. That being said, your last point sounds like a decent proposal for how to combat this problem. I'm not sure if it would work in practice, however, as healthcare legislation seems to be hotly contested on all sides.
LeifCarrotson 8y ago
> The idea is not to put people with similar levels of risk in the same pool. The idea is to make the pool as large as possible, charge everyone for their expected cost + a margin... As a consumer who is fortunate enough to get life insurance at the "Super Preferred" low-risk rate, I would prefer be in a small pool that excludes people with higher actual costs. That's an economic preference, not moral, though my morals are not bothered by using the system as designed. As long as insurance companies are free to offer plans that admit only really healthy people and exclude people with higher actual costs, my plan will be cheaper. Really healthy people will drop out of the larger pool and into the cheaper pool. The larger pool will, as a result, get more expensive. And the people remaining in what's effectively the shallow end of the pool will be offered a "Preferred" rate that's more expensive than super preferred but less than the large pool. Eventually you end up with small risk pools, with the least insurable, highest-risk and highest actual cost customers unable to buy affordable life insurance. If you're a 20-year-old obese diabetic who smokes and has a family history of cancer, and the actuarial table says there's a 50% chance that your 50-year $1M policy will have to pay out, your premiums before a margin are 1M * 50% / 50 / 12 = $833/month. That's not really affordable, even if it would be wise for our unhealthy friend if he or she has dependents. My super-preferred policy costs me $21.25/month. I empathize with the plight of the uninsurable. Given my voting history on health insurance issues, I would probably vote in favor of a law that limited segmentation and would bump my premiums to, say $50/mo and would offer life insurance to the $833/mo individual at the same rate. But I'm not going to jump from my pool into a more expensive pool by myself if that signal will fall on deaf ears.

Retric 8y ago

Knowing more about risk pools does not change the rate of deaths. So, for everything negative you learn someone else ends up in a more positive light as the overall average does not change. Now, if we find a lot of negative things about one person their premiums might become unaffordable but otherwise it's not a big deal for the industry.

NegativeLatency 8y ago

> Why should a profit-seeking insurance company insure me past some point Seems like a good argument for single payer insurance.

maxxxxx 8y ago
I think it's an argument for very large non discriminating risk pools.
- monocasa 8y ago
  The biggest being one large risk pool that all citizens are a part of.
- op00to 8y ago
  Seems like a good argument for single payer insurance!
  - maxxxxx 8y ago
    Not necessarily. You can have multiple insurances compete over the whole country.
    - buckminster 8y ago
      And they compete on which can most successfully discriminate without getting caught. What's the point?
      - maxxxxx 8y ago
        No discrimination. You take anybody or you are out of the market.
        LargeWu 8y ago
        What is the motive then for a for-profit company to even exist? If every insurance company has to take everybody, that implies they have to also provide the same coverage to everyone at the same rate. Barring cartel-like collusion, which is already illegal, the market price would quickly converge towards the cost of insurance. There would be basically no upside, but almost unlimited downside.

jotm 8y ago

> Why should a profit-seeking insurance company insure me past some point when the data strongly indicates i'm going to need drastic and expensive intervention. They shouldn't.

james1071 8y ago
that is why the private sector cannot alone supply medical insurance

iguy 8y ago

In Europe I believe that insurance already may not discriminate on sex: compared to women, men's car insurance got cheaper and retirement annuities got more expensive, when this began. Why wouldn't we just extend this to cover more things? We are free to design what kind of insurance market we wish to have. For-profit companies don't have to be operating in some kind of absolute free-for-all.

oligopoly 8y ago
>In Europe I believe that insurance already may not discriminate on sex: compared to women, men's car insurance got cheaper That's false. After EU came meddling insurance was raised for men to the same level women had even though men have statistically lower risk of accident.
- admax88q 8y ago
  That's odd. Here in North America I believe most insurance companies charge men more than women as they have a higher risk of serious accidents.
  - oligopoly 8y ago
    Could depend on the age group and driving record. In some age groups men can be overly aggressive drivers but overall less accidents compared to women. For the person who downvoted OP was referring to the EU. Previously men paid less but when EU decided statistics are sexist now both pay the same higher amount. Yay for the consumer
    - iguy 8y ago
      Anyone got data? Prices change over time. The best I could do in 5 minutes googling was newspapers complaining that, on average, men still pay more... because they drive (on average) further, in more expensive cars. And rumours that they are setting the rates for different professions as a way to get around the rule... huge differences like this: Dental Nurse Less than 1pc male £840 Solicitor 59pc male £848 Sports and leisure assistants 56pc male £880 Civil engineer 92pc male £910 Social worker 21pc male £920 Plasterer 98pc male £950 I had an idea that retirement annuities etc, which are a much bigger deal, were much more regulated & could only price based on a few numbers. But I don't have a link.

dreamcompiler 8y ago

> Pushing them into some kind of not-for-profit Health (and perhaps life) insurance should be not-for-profit, period. Healthcare providers in general should also be either nonprofit, or they should be mandated to publish their prices and stick to them, so that transparent competition exists in the marketplace.

pmiller2 8y ago
I’m not saying I disagree, but what’s your argument that life insurance should be nonprofit?
- dreamcompiler 8y ago
  Insurance companies that make a profit are strongly incentivized to maximize premiums and find excuses not to pay claims, which is exactly what TFA suggests. Doing these things is exactly what gets you a nice bonus if you're a manager at an insurance company. A non-profit organizational structure removes such personal incentives for customer abuse.

tfehring 8y ago

>As I understand it, the entire concept of insurance is based around gathering relatively large groups of people with a solid understanding of their average risks for certain types of loss. Given the averages hold accurate over time, those that need a payout can get one, and the insurance company makes money in aggregate. >However, the better the insurance companies can understand our risk profiles as individuals (going well beyond age/sex/smoking/etc/etc/etc) - eventually (in theory) a motivated insurance company is going to be able to determine that I have a 90% chance of developing Serious Syndrome X while you have a 97% chance of developing Minor Issue Y. Even as predictive models improve, insurance will always rely on risk pooling. Even if you believe that insurable events like death are completely deterministic, insurers' information will always be imperfect. So models will always have an epsilon (noise) term, which is diversifiable. >Today we might get put into the risk pool. But as the science advances, the risk pools can be cut into finer and finer (and more accurate) risk pools. Why should a profit-seeking insurance company insure me past some point when the data strongly indicates i'm going to need drastic and expensive intervention. Because they will still profit on average if they charge you more than the expected value of claims. Insurers have historically been hesitant to insure high-risk individuals for any price, in part because they're not confident enough in their ability to accurately quantify the risk associated with them. I'd argue that more granular and accurate rating will actually improve high-risk individuals' access to life insurance for that reason. Edited to add: I suspect that the same would be true of health insurers, though that's currently moot in the US due to the ACA. >It seems like the three ways to avoid this are: 1. "Advances" like the one mentioned here don't turn out to have enough predictive power and insurance continues to operate much as before 2. Some people just can't get for-profit insurance, at least not for health coverage (I'd think accidents will always remain much harder to predict than e.g. heart disease). Pushing them into some kind of not-for-profit 3. Regulation forces blinders on to underwriters essentially saying "actuarial science advances to here and no further" The status quo is mostly #1 for life insurance, and I'd contend that it's likely to stay that way for the foreseeable future. Health insurance is squarely in bucket #3 in the US, but who knows how long that will last or where it will go from here. N.B.: I'm a (non-credentialed) life actuary.