The death of insurance



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Posted by: stak
Posted on: 2008-02-24 22:51:56

Saw this posted on Slashdot, and it reminded me of a discussion I had back when I took SOC 232 (an otherwise useless course). Insurance works because of lack of perfect information. It's basically a way of hedging your bets - insurance companies take the average cost of whatever it is they're insuring across a number of people, and charge that to each person (plus a little something for themselves). Within that group of people, there are some who would otherwise have to pay a huge amount, but most of them wouldn't have to pay as much as they do in insurance premiums. From the point of view of the insurance company, those high-paying people are liabilities, and the low-paying people are assets. People agree to get insurance for the same reason that insurance companies offer it: neither of the two know which category an individual belongs to, so it's a mutually beneficial arrangement.

The slashdot post describes what happens as our information gets more exact (at least with regards to health): insurance companies stop accepting the high-paying people as customers. Of course, there's a flip side that isn't mentioned: the low-paying people will simply stop getting insurance. If you got one of these miraculous DNA tests that told you your entire medical future, and you realized that you would never be severely ill, why would you bother with insurance? It would much cheaper to simply set aside some money and pay the costs yourself. With insurance companies refusing to accept some people as customers, and the remaining people refusing to pay for insurance, it's should be pretty obvious that insurance companies are going to start going broke (note that this only applies to areas where the accuracy of our information will increase dramatically, such as possibly health care).

This puts us back in the state we were in before insurance, where a few unlucky people will have to pay huge amounts and the rest will lead merry lives. The way I see it, this will lead to one of two possible outcomes. One is that the role of insurer will be taken up by the government and done through taxes (such as already happens in various countries that are not the United States). The other is that the unlucky people will simply fade away in a few generations (evolution by financial selection). I suspect that which of the two outcomes takes place in any given country hinges upon their current policies towards health care. I much prefer the first outcome, so I'm glad (again) that I'm not living a little farther south.

Posted by Fai at 2008-02-24 23:50:17
you're not considering the impact of accidents, which are not disclosed in your genes but are still covered by insurance. For this reason, I don't think that "healthy" people will choose not to get insurance.

The degree to which the government will pay is the degree to which the country is socialistic. whether or not socialims is good is a different debate entirely.
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Posted by varun at 2008-02-25 00:17:20
Fai beat me to it, but essentially insurance covers two things:
a) it's a hedge against a contingent loss (ex.: accidents)
b) it's compensation against a definite loss (ex.: death)

You've covered a limited example of a contingent loss (improvement in information knowability) that allows you to reduce the estimated risk factor for many, and increase it for the remainder by genetic testing. However, as Fai noted, it doesn't cover accidents - which by definition are unexpected. In order for you to gain "perfect information" for accidents, you would need to be able to see into the future - in which case, why wouldn't you avoid the accident in the first place?

Second, the article fails to realize that insurance also compensates against a definite loss. Life insurance is a good example. Everyone will die, with our current technology. A definite payback may make the loss more acceptable, or at least, defer the costs (say, funeral costs) associated with the definite loss.
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Posted by stak at 2008-02-25 08:44:03
Fine, fine. As usual, I'm just making stuff up and have no clue what I'm talking about :)
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Posted by varun at 2008-02-25 13:16:21
I recommend our good friend, Mr W. Pedia - ask him about insurance. :)

But the result that insurance companies die is not incompatible with perfect information - if you had perfect information, then you would not be subject to accidents since you could avoid them. Of course, if you can time travel or at least exchange information with the future, then, well, avoiding death and other definite costs would be a matter of stepping backwards in time to a point that you could avoid it.
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