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That might be the RNC's talking points of how insurance works, but given that I'm in the industry, I can tell you that insurance exists to offset risk by spread

That might be the RNC's talking points of how insurance works, but given that I'm in the industry, I can tell you that insurance exists to offset risk by spreading costs over a pool of people. The concept of "risk" by default means that certain people will never utilize the service. Premium is a factor of the risk analysis, not a transaction fee. This works very well for concepts like auto or home insurance: most people will - in a given year - never actually crash their cars or destroy their homes. The premium they pay is based on the risk profile of one of these things happening to them, and overall to the pool. Health insurance is a little different, but the concepts remain the same. The only real difference between a nationally run program and several private programs - assuming a level of administrative competency - is the size of the pool. The larger the pool, the less the risk, the cheaper the average premium. You can call it dirty words and all, but if you are against the concept of national insurance programs as a principle, you should really evaluate your view of insurance in general, since you're "subsidizing" people who crash their cars, have house fires, pick the wrong banks etc, etc. As an aside: I'm in Canada. As such you might find it interesting that while I believe the US system isn't using the full potential of the available pool, I believe our system has forgotten a lot of the concepts that sustain the insurance industry by just declaring medical care a "right" despite the costs. Both of our countries would be better served by abandoning ideologies here.

anamax 15y ago
> That might be the RNC's talking points of how insurance works, but given that I'm in the industry, I can tell you that insurance exists to offset risk by spreading costs over a pool of people. Both insurance and subsidies (as I described them) spread risks over a pool. The difference is in how we charge folks in the pool. If we charge them by their expected cost, it's insurance. If we charge some people significantly more than their expected cost so we can charge others less, the first group is subsidizing the second. And no, the fact that I don't have a claim doesn't imply that I'm subsidizing anyone any more than the fact that someone hits the lottery implies that lotteries are a good bet. The relevant question is how my cost of "insurance" compares to my expected claims. There is value in reducing variance - I'd rather pay $600/year for 10 years instead of paying $5800 one year and nothing for 9 years. And, I'm willing to take the chance that I'd never pay anything to avoid the hit of paying $5800 twice and nothing 8 times. (In this example, I'm paying $200 so I'm not subject to variance.) However, I'm a lot less willing to pay $600/year if I think that my expected costs are $1k once every 10 years. That's the problem with subsidies disguised as "insurance". The rational response is to try to get out of the pool. > Premium is a factor of the risk analysis, not a transaction fee. I didn't refer to insurance premiums, I referred to the fact that maintaining a pool has costs which the payments must cover in addition to the losses. > The larger the pool, the less the risk, the cheaper the average premium. That's simply not true. My risk of having a car accident does not depend on how many people are in "the pool". There can be economies of scale in the costs of maintaining the pool, but they have nothing to do with risk. > if you are against the concept of national insurance programs as a principle, you should really evaluate your view of insurance in general, since you're "subsidizing" people who crash their cars, have house fires, pick the wrong banks etc, etc. I'm not against insurance. However, subsidies have issues and it is dishonest to claim otherwise and confuse the two.
- run4yourlives 15y ago
  I don't think you have any idea how insurance works. >If we charge them by their expected cost, it's insurance. Um, no. Insurance premiums are determined by total cost of claims plus expected inflation plus administration costs. There is no "expected cost". You are making this term up. There is only risk and the premium mathematically calculated to cover said risk. Making these calculations is the entire purpose of a whole profession: http://www.soa.org/about/about-what-is-an-actuary.aspx http://www.soa.org/about/about-what-is-an-actuary.aspx >I referred to the fact that maintaining a pool has costs which the payments must cover in addition to the losses. ...which is always significantly less than the losses, since administration fees are usually a percentage of claims. > My risk of having a car accident does not depend on how many people are in "the pool". You're failing again to understand the math. The risk of you having a car accident is only part of the equation, the other part is the number of people that are able to absorb said costs. Any artificial group will vary from the mean overall risk, either being better or worse. The larger the pool, the less this variance. This is why you can't get insurance if you get sick: The pool's overall risk is artificially lowered to maintain competitive premiums. >However, subsidies have issues and it is dishonest to claim otherwise and confuse the two. There is no real distinction here except for the doublespeak you're introducing in an attempt to somehow differentiate health insurance from any number of insurance services. Actuaries do not define the term subsidy. It's a political creation to confuse and obscure.
  - anamax 15y ago
    > Insurance premiums are determined by total cost of claims plus expected inflation plus administration costs. There is no "expected cost". You are making this term up. I'm not using jargon, but the meaning is both clear and correct. >There is only risk and the cost of that risk is the meaning of "expected cost". However, you did make an error. Premiums don't depend on the total cost of claims, but on the EXPECTED total cost of claims. That's where actuaries come in - they predict claims costs (and try to reduce them) - you don't need actuaries to compute the total cost of claims. See if you can figure out why it is the expected and not actual costs. However, that's just how you get the total payments required to create and maintain a shared-risk pool - you have choices wrt the price paid by different members of the pool. (Actually, it's a shared-cost pool because it's not the incidence odds but the product of the incidence odds and their cost, but I digress.) Subsidy refers to a class of pricing decisions, namely those that ignore (to some extent) relative costs, so it's neither surprising nor relevant to say that actuaries don't define subsidy. Moreover, actuaries don't determine pricing systems - they merely provide cost-predictions when and where necessary. For example, you could charge each member their individual predicted claims plus a share of the other costs. This would be risk-based, or rather, expected-cost-based, pricing and is what is traditionally known as "insurance". In this case, actuaries are involved in determining pool-member pricing. Or, you could charge every member the same amount, namely the total divided by the number of members, even though your actuaries tell you that some members of the pool have higher predicted claims than others. If you do this, the high-expected-cost members of the pool are being subsidized by the low-expected-cost members. This is a subsidy, even though there's still a shared-cost pool. In this case, actuaries have no role in determining a given member's price - they're just needed to determine the expected cost of the whole pool. Note that high-expected-cost members can save money by leaving a pool that has cost-based pricing for a pool where they'll receive subsidies. However, low-expected-cost members can save money by leaving a pool that requires them to pay subsidies for pool that has cost-based pricing. In the (artificial) case where all high cost members are identical as are low-cost members, the end result is that everyone ends up paying cost-based prices but they end up in different pools (assuming each pool pays its costs). >> My risk of having a car accident does not depend on how many people >> are in "the pool". >You're failing again to understand the math. Not at all. You claimed that my risks depended on pool size - they don't. The fact that the variance in total pool claims does depend on pool size doesn't change that fact. > This is why you can't get insurance if you get sick Actually, you can. A pool with expected-cost-based pricing makes money on all possible pool members, regardless of expected cost. However, a pool with subsidies does benefit from avoiding high-expected-cost members. >There is no real distinction here except for the doublespeak you're introducing in an attempt to somehow differentiate health insurance from any number of insurance services. I've never tried to differentiate health insurance from other insurance. I'm differentiating different pricing policies for shared-risk pools. Some are insurance while others have internal subsidies.

anamax 15y ago

> That might be the RNC's talking points of how insurance works, but given that I'm in the industry, I can tell you that insurance exists to offset risk by spreading costs over a pool of people. Both insurance and subsidies (as I described them) spread risks over a pool. The difference is in how we charge folks in the pool. If we charge them by their expected cost, it's insurance. If we charge some people significantly more than their expected cost so we can charge others less, the first group is subsidizing the second. And no, the fact that I don't have a claim doesn't imply that I'm subsidizing anyone any more than the fact that someone hits the lottery implies that lotteries are a good bet. The relevant question is how my cost of "insurance" compares to my expected claims. There is value in reducing variance - I'd rather pay $600/year for 10 years instead of paying $5800 one year and nothing for 9 years. And, I'm willing to take the chance that I'd never pay anything to avoid the hit of paying $5800 twice and nothing 8 times. (In this example, I'm paying $200 so I'm not subject to variance.) However, I'm a lot less willing to pay $600/year if I think that my expected costs are $1k once every 10 years. That's the problem with subsidies disguised as "insurance". The rational response is to try to get out of the pool. > Premium is a factor of the risk analysis, not a transaction fee. I didn't refer to insurance premiums, I referred to the fact that maintaining a pool has costs which the payments must cover in addition to the losses. > The larger the pool, the less the risk, the cheaper the average premium. That's simply not true. My risk of having a car accident does not depend on how many people are in "the pool". There can be economies of scale in the costs of maintaining the pool, but they have nothing to do with risk. > if you are against the concept of national insurance programs as a principle, you should really evaluate your view of insurance in general, since you're "subsidizing" people who crash their cars, have house fires, pick the wrong banks etc, etc. I'm not against insurance. However, subsidies have issues and it is dishonest to claim otherwise and confuse the two.

run4yourlives 15y ago
I don't think you have any idea how insurance works. >If we charge them by their expected cost, it's insurance. Um, no. Insurance premiums are determined by total cost of claims plus expected inflation plus administration costs. There is no "expected cost". You are making this term up. There is only risk and the premium mathematically calculated to cover said risk. Making these calculations is the entire purpose of a whole profession: http://www.soa.org/about/about-what-is-an-actuary.aspx http://www.soa.org/about/about-what-is-an-actuary.aspx >I referred to the fact that maintaining a pool has costs which the payments must cover in addition to the losses. ...which is always significantly less than the losses, since administration fees are usually a percentage of claims. > My risk of having a car accident does not depend on how many people are in "the pool". You're failing again to understand the math. The risk of you having a car accident is only part of the equation, the other part is the number of people that are able to absorb said costs. Any artificial group will vary from the mean overall risk, either being better or worse. The larger the pool, the less this variance. This is why you can't get insurance if you get sick: The pool's overall risk is artificially lowered to maintain competitive premiums. >However, subsidies have issues and it is dishonest to claim otherwise and confuse the two. There is no real distinction here except for the doublespeak you're introducing in an attempt to somehow differentiate health insurance from any number of insurance services. Actuaries do not define the term subsidy. It's a political creation to confuse and obscure.
- anamax 15y ago
  > Insurance premiums are determined by total cost of claims plus expected inflation plus administration costs. There is no "expected cost". You are making this term up. I'm not using jargon, but the meaning is both clear and correct. >There is only risk and the cost of that risk is the meaning of "expected cost". However, you did make an error. Premiums don't depend on the total cost of claims, but on the EXPECTED total cost of claims. That's where actuaries come in - they predict claims costs (and try to reduce them) - you don't need actuaries to compute the total cost of claims. See if you can figure out why it is the expected and not actual costs. However, that's just how you get the total payments required to create and maintain a shared-risk pool - you have choices wrt the price paid by different members of the pool. (Actually, it's a shared-cost pool because it's not the incidence odds but the product of the incidence odds and their cost, but I digress.) Subsidy refers to a class of pricing decisions, namely those that ignore (to some extent) relative costs, so it's neither surprising nor relevant to say that actuaries don't define subsidy. Moreover, actuaries don't determine pricing systems - they merely provide cost-predictions when and where necessary. For example, you could charge each member their individual predicted claims plus a share of the other costs. This would be risk-based, or rather, expected-cost-based, pricing and is what is traditionally known as "insurance". In this case, actuaries are involved in determining pool-member pricing. Or, you could charge every member the same amount, namely the total divided by the number of members, even though your actuaries tell you that some members of the pool have higher predicted claims than others. If you do this, the high-expected-cost members of the pool are being subsidized by the low-expected-cost members. This is a subsidy, even though there's still a shared-cost pool. In this case, actuaries have no role in determining a given member's price - they're just needed to determine the expected cost of the whole pool. Note that high-expected-cost members can save money by leaving a pool that has cost-based pricing for a pool where they'll receive subsidies. However, low-expected-cost members can save money by leaving a pool that requires them to pay subsidies for pool that has cost-based pricing. In the (artificial) case where all high cost members are identical as are low-cost members, the end result is that everyone ends up paying cost-based prices but they end up in different pools (assuming each pool pays its costs). >> My risk of having a car accident does not depend on how many people >> are in "the pool". >You're failing again to understand the math. Not at all. You claimed that my risks depended on pool size - they don't. The fact that the variance in total pool claims does depend on pool size doesn't change that fact. > This is why you can't get insurance if you get sick Actually, you can. A pool with expected-cost-based pricing makes money on all possible pool members, regardless of expected cost. However, a pool with subsidies does benefit from avoiding high-expected-cost members. >There is no real distinction here except for the doublespeak you're introducing in an attempt to somehow differentiate health insurance from any number of insurance services. I've never tried to differentiate health insurance from other insurance. I'm differentiating different pricing policies for shared-risk pools. Some are insurance while others have internal subsidies.