7 ms·

Insurance has the worst moral hazard: the winning strategy is to sell a product that pretends to cover your customers but actually doesn't. Your customers give

Insurance has the worst moral hazard: the winning strategy is to sell a product that pretends to cover your customers but actually doesn't. Your customers give you money for nothing and they will only realize it once in a blue moon. You can probably buy off the few who are capable of causing actual blowback, and if that doesn't work just rebrand. Until everyone becomes a contract lawyer capable of devoting weeks to insurance shopping every 6 months, the only good insurance market is a heavily regulated one, even though heavy regulation comes with its own gigantic bag of worms.

ipaddr 5y ago
Aren't insurance rates regulated meaning if they payout a smaller amount than expected the rates will go down next year?
- saalweachter 5y ago
  Now; I think the "medical loss ratio" requirements were one of the most important features of the ACA. One of the worst offenders from the before-times was an insurance plan targeted at college students that had a 10% MLR.
  - kristjansson 5y ago
    To save those looking it up: medical loss ratio is the fraction of premiums an insurer spends on actual healthcare expenses. 10% means 90 cents of every dollar paid in premium goes to admin/profit/etc.
  - munk-a 5y ago
    I wonder how MLRs interact with subsidies, backroom deals and manufacturer rebates - if an payer can inflate their MLR by double paying for a medication - but then they get a rebate back for half the cost they paid will MLR tracking catch that? Payers often get incentivized to promote certain drugs via manufacturer kickbacks and I wonder if this system is also used to run around MLR requirements.
- deleted 5y ago
  [deleted]
- monocasa 5y ago
  So that encourages greater payouts more or less synced with greater premiums in order to increase year over year real profits. And given that the payouts are very nearly a function of how hard the insurance company can negotiate, they can simply choose to call off the negotiations when they reach their target amount.
  - Retric 5y ago
    Only up to a point, they still accept or recheck claims arbitrarily to get closer to their targets. Worse they have incentives to decrease efficiency by increasing paperwork etc. Private medical insurance in the US is a horridly inefficient system. Separating the claims process from insurance companies hands might help, but their incentives are never going to line up with consumers.
    - lotsofpulp 5y ago
      This is not remotely true.
    - dllthomas 5y ago
      > Worse they have incentives to decrease efficiency by increasing paperwork etc. Money spent on paperwork comes out of the same pile as profit. The MLR cap preserves incentive to reduce paperwork, wherever premiums and payouts sit.
      - Retric 5y ago
        Not internal paperwork. Think in terms of industry wide collusion not a single insurance company. If lobbing or an industry group can drive up healthcare costs via say paperwork or regulations then every health insurance company is “forced” to raise premiums and as the maximum profit per premium ratio is fixed that also increases the total possible industry wide profit. Of course insurance companies are also in competition so they have individual incentives to keep premiums cost competitive.
        5y ago
- joshAg 5y ago
  for admitted policies, usually yes. But it's not just that the rate for the next year goes down. Premium payments have to be refunded too.
joshAg 5y ago
Payouts and premiums aren't where the money is in insurance. It's in the return on investments the insurer makes with the money they hold in trust. From an insurer's point of view, the best market isn't one with no payouts, but one where there is a highly predictable amount of payouts, because the better they can predict how much they need to payout, the more aggressive they can be with their investments. Yeah, there's a decent amount of regulation around payouts to protect the consumer, but it pales in comparison to the regulations around making sure that the insurer has enough liquid assets on hand, that the total valuation of their assets (ie investments) remains large enough, and that they're charging a minimum amount of premium for the risk that they're taking on.
- monocasa 5y ago
  > It's in the return on investments the insurer makes with the money they hold in trust ...sourced from the premiums. When they pull in more premiums, they have more money to invest.
  - deleted 5y ago
    [deleted]
  - joshAg 5y ago
    No, it's sourced from the initial capitalization of the firm and then realized returns that are reinvested. You can't offer insurance until you're capitalized enough to handle claims on the same day the policy takes effect. Ideally the premiums will cover payouts and day-to-day business expenses, so the invested money can just keep being reinvested, hopefully into longer term and more aggressive investments. The premiums and payouts get rolled into underwriting profit/income. And that can eventually get rolled into new investments. Here, look at state farm for 2019[1]. Their underwriting gain was $777 million on $65.2 billion in total premium. Their investment income was $5 billion with a net worth of over $100 billion, which is more than 6 times larger their underwriting premiums. Their profit ratio for underwriting is like 1.2% because they're not trying to maximize that profit. A large reason they're not trying to maximize it is that for admitted policies, there's usually an upper limit to how much aggregate premium can go to anything other than paying out claims (eg: [2] and [3]). So for an insurer, they don't want to set themselves up to depend on premiums to fund the investment arm because 1) there's an upper limit on how much aggregate premium can go towards anything other than claims 2) there's no limit on how much aggregate premium can go towards claims, 3) growing premium haphazardly can result in less money available for investing due to other regulations that limit risk and require a certain amount of liquidity for claims. [1]: https://newsroom.statefarm.com/2019-state-farm-financial-results/ https://newsroom.statefarm.com/2019-state-farm-financial-res... [2]: https://www.law.cornell.edu/regulations/california/10-CCR-Sec-2644-12 https://www.law.cornell.edu/regulations/california/10-CCR-Se... [3]: https://consumerfed.org/press_release/auto-insurers-reaped-nearly-30-billion-pandemic-windfall-profit-in-2020-as-state-insurance-regulators-fail-to-protect-consumers/ https://consumerfed.org/press_release/auto-insurers-reaped-n...
wuliwong 5y ago
Insurance isn't inherently a moral hazard.
- fragmede 5y ago
  Inherently? No, just under capitalism.
  - folkhack 5y ago
    I know that any anti-capitalism comments get immediately downvoted here but yeah... The privatization of healthcare is a conflict of interest which is a product of our hyper-capitalistic society. You can't make a profit center out of human services without dehumanizing it in the process - the very nature of profit/capitalistic societies means someone has to lose and I see no place for these interests in healthcare or education. Edit: yep - expected that. Maybe someone argue as to why privatization (which is a product of capitalism) isn't a conflict of interest in regards to healthcare?
    - opo 5y ago
      >...the very nature of profit/capitalistic societies means someone has to lose The last time you bought milk did you lose or did the grocery store? The last time you paid money for a hair cut, who lost there? The extreme regulation of all aspects of health care that has developed over the last century has improved some problems and created other problems - the problems specific to healthcare have little to do with the "the very nature of profit/capitalistic societies"
      - folkhack 5y ago
        > The last time you bought milk did you lose or did the grocery store? There's way more people involved in that supply chain then me and the store. This is an over simplification. Outside of the obvious answer of "the cows" - factory farming has been destroying my home state causing huge problems in rural America. Also - the environment. Big time the loser there is the environment for literally any bovine farming. > The last time you paid money for a hair cut When I was getting my hair cut professionally I tipped a $20 because I knew the gal cutting my hair working at the midwestern mall Regis Salon was making jack-all. I knew this because I worked at Geeksquad with her boyfriend, eventually husband. If I were not to tip well she would be at-risk for making minimum wage for that hour - and since you can't support yourself on minimum wage I see that as her losing. I've always tipped my butt off because I know without that they lose. --- So yeah - sorry... I anecdotally do see losers in the situations you described. I don't have to look hard to see them.

ipaddr 5y ago

Aren't insurance rates regulated meaning if they payout a smaller amount than expected the rates will go down next year?

saalweachter 5y ago
Now; I think the "medical loss ratio" requirements were one of the most important features of the ACA. One of the worst offenders from the before-times was an insurance plan targeted at college students that had a 10% MLR.
- kristjansson 5y ago
  To save those looking it up: medical loss ratio is the fraction of premiums an insurer spends on actual healthcare expenses. 10% means 90 cents of every dollar paid in premium goes to admin/profit/etc.
- munk-a 5y ago
  I wonder how MLRs interact with subsidies, backroom deals and manufacturer rebates - if an payer can inflate their MLR by double paying for a medication - but then they get a rebate back for half the cost they paid will MLR tracking catch that? Payers often get incentivized to promote certain drugs via manufacturer kickbacks and I wonder if this system is also used to run around MLR requirements.
deleted 5y ago
[deleted]
monocasa 5y ago
So that encourages greater payouts more or less synced with greater premiums in order to increase year over year real profits. And given that the payouts are very nearly a function of how hard the insurance company can negotiate, they can simply choose to call off the negotiations when they reach their target amount.
- Retric 5y ago
  Only up to a point, they still accept or recheck claims arbitrarily to get closer to their targets. Worse they have incentives to decrease efficiency by increasing paperwork etc. Private medical insurance in the US is a horridly inefficient system. Separating the claims process from insurance companies hands might help, but their incentives are never going to line up with consumers.
  - lotsofpulp 5y ago
    This is not remotely true.
  - dllthomas 5y ago
    > Worse they have incentives to decrease efficiency by increasing paperwork etc. Money spent on paperwork comes out of the same pile as profit. The MLR cap preserves incentive to reduce paperwork, wherever premiums and payouts sit.
    - Retric 5y ago
      Not internal paperwork. Think in terms of industry wide collusion not a single insurance company. If lobbing or an industry group can drive up healthcare costs via say paperwork or regulations then every health insurance company is “forced” to raise premiums and as the maximum profit per premium ratio is fixed that also increases the total possible industry wide profit. Of course insurance companies are also in competition so they have individual incentives to keep premiums cost competitive.
      - 5y ago
joshAg 5y ago
for admitted policies, usually yes. But it's not just that the rate for the next year goes down. Premium payments have to be refunded too.

joshAg 5y ago

Payouts and premiums aren't where the money is in insurance. It's in the return on investments the insurer makes with the money they hold in trust. From an insurer's point of view, the best market isn't one with no payouts, but one where there is a highly predictable amount of payouts, because the better they can predict how much they need to payout, the more aggressive they can be with their investments. Yeah, there's a decent amount of regulation around payouts to protect the consumer, but it pales in comparison to the regulations around making sure that the insurer has enough liquid assets on hand, that the total valuation of their assets (ie investments) remains large enough, and that they're charging a minimum amount of premium for the risk that they're taking on.

monocasa 5y ago
> It's in the return on investments the insurer makes with the money they hold in trust ...sourced from the premiums. When they pull in more premiums, they have more money to invest.
- deleted 5y ago
  [deleted]
- joshAg 5y ago
  No, it's sourced from the initial capitalization of the firm and then realized returns that are reinvested. You can't offer insurance until you're capitalized enough to handle claims on the same day the policy takes effect. Ideally the premiums will cover payouts and day-to-day business expenses, so the invested money can just keep being reinvested, hopefully into longer term and more aggressive investments. The premiums and payouts get rolled into underwriting profit/income. And that can eventually get rolled into new investments. Here, look at state farm for 2019[1]. Their underwriting gain was $777 million on $65.2 billion in total premium. Their investment income was $5 billion with a net worth of over $100 billion, which is more than 6 times larger their underwriting premiums. Their profit ratio for underwriting is like 1.2% because they're not trying to maximize that profit. A large reason they're not trying to maximize it is that for admitted policies, there's usually an upper limit to how much aggregate premium can go to anything other than paying out claims (eg: [2] and [3]). So for an insurer, they don't want to set themselves up to depend on premiums to fund the investment arm because 1) there's an upper limit on how much aggregate premium can go towards anything other than claims 2) there's no limit on how much aggregate premium can go towards claims, 3) growing premium haphazardly can result in less money available for investing due to other regulations that limit risk and require a certain amount of liquidity for claims. [1]: https://newsroom.statefarm.com/2019-state-farm-financial-results/ https://newsroom.statefarm.com/2019-state-farm-financial-res... [2]: https://www.law.cornell.edu/regulations/california/10-CCR-Sec-2644-12 https://www.law.cornell.edu/regulations/california/10-CCR-Se... [3]: https://consumerfed.org/press_release/auto-insurers-reaped-nearly-30-billion-pandemic-windfall-profit-in-2020-as-state-insurance-regulators-fail-to-protect-consumers/ https://consumerfed.org/press_release/auto-insurers-reaped-n...

wuliwong 5y ago

Insurance isn't inherently a moral hazard.

fragmede 5y ago
Inherently? No, just under capitalism.
- folkhack 5y ago
  I know that any anti-capitalism comments get immediately downvoted here but yeah... The privatization of healthcare is a conflict of interest which is a product of our hyper-capitalistic society. You can't make a profit center out of human services without dehumanizing it in the process - the very nature of profit/capitalistic societies means someone has to lose and I see no place for these interests in healthcare or education. Edit: yep - expected that. Maybe someone argue as to why privatization (which is a product of capitalism) isn't a conflict of interest in regards to healthcare?
  - opo 5y ago
    >...the very nature of profit/capitalistic societies means someone has to lose The last time you bought milk did you lose or did the grocery store? The last time you paid money for a hair cut, who lost there? The extreme regulation of all aspects of health care that has developed over the last century has improved some problems and created other problems - the problems specific to healthcare have little to do with the "the very nature of profit/capitalistic societies"
    - folkhack 5y ago
      > The last time you bought milk did you lose or did the grocery store? There's way more people involved in that supply chain then me and the store. This is an over simplification. Outside of the obvious answer of "the cows" - factory farming has been destroying my home state causing huge problems in rural America. Also - the environment. Big time the loser there is the environment for literally any bovine farming. > The last time you paid money for a hair cut When I was getting my hair cut professionally I tipped a $20 because I knew the gal cutting my hair working at the midwestern mall Regis Salon was making jack-all. I knew this because I worked at Geeksquad with her boyfriend, eventually husband. If I were not to tip well she would be at-risk for making minimum wage for that hour - and since you can't support yourself on minimum wage I see that as her losing. I've always tipped my butt off because I know without that they lose. --- So yeah - sorry... I anecdotally do see losers in the situations you described. I don't have to look hard to see them.