For 10 years, I was an instructor of risk and insurance at LSU in Baton Rouge. I’d occasionally be invited to testify before legislative committees as an insurance expert. Often, some of the pending legislation was designed to solve real problems that were not fixable with insurance. In these cases, my testimony was simple. I’d explain:
“Ladies and gentlemen, today, this legislative body has the ability to outlaw the effects of gravity on all state-owned lands. If this legislation is approved, a citizen can jump off the observation deck on the 27th floor and will die EVEN THOUGH IT IS AGAINST THE LAW. Gravity is unforgiving like that.”
The first three examples below are real and, unfortunately, not sustainable in a long-term insurance model because we can't ignore adverse selection any more than we can ignore gravity. The fourth item is a “scientist” moving from the facts – and becoming (in my opinion) a social engineer acting on feelings.
Consider the brief notes below as an introduction to each issue, not a complete discussion.
1. The Affordable Care Act – I’ll remove the emotion of illness and fairness from this discussion and just look at the numbers. From a Jan. 13, 2017, Wall Street Journal article, see the following statistics:
- The most expensive 5% of patients use 49% of health spending.
- The most expensive 20% of patients use 82% of health spending.
- The healthiest 50% of patients use only 3% of health spending.
Ours is a house divided. 50% of the market is perfect for an insurance model -- the other 50% is not, because insurance works when there is a “chance of loss,” not when losses are certain. In a loss-certain model, the No. 1 need is funding -- more and more money.
See also: U.S. Healthcare: No Simple Insurtech Fix
2. NFIP (National Flood Insurance Program) – From the Acadiana Advocate (Jan. 26, 2018) see the following headlines: “Hopes for flood insurance deal dim – Another short-term extension expected”
The future of NFIP is threatened by adverse selection. A disproportional number of high-risk buyers populate the pool, and an insufficient number of safe buyers (low-risk properties) exist to assure affordability and thus sustainability.
3. Auto insurance (issues of tort) – In the late 1970s in Louisiana, mandatory auto liability insurance became the law of the land. We can debate the wisdom or appropriateness of this, but it is the law. Today, ours is a house divided – those looking to sue and those fearful of being sued.
Often, our industry invites (and sometimes deserves) lawsuits by being inefficient or ineffective or unreasonable in claims handling. In other cases, lawyers are searching for incidents and accidents that can do more than indemnify a claimant for a loss by creating wealth or at least “over-indemnification” through the courtroom. Our industry is becoming a tort roulette wheel.
On a 140-mile trip from New Iberia to Baton Rouge, I counted 33 billboards for a specific attorney. There were many more for many others. Is this a cost the market is willing and able to pay? How many millions (billions) of dollars are taken out of the risk pool annually for over-litigation? Are we, the premium payers, willing to pay that cost?
4. Fairness in lieu of actuarial science – At its simplest, the insurance process includes four elements. Do these effectively, and you have a green and sustainable business model:
- Identify the risk to be insured
- Define the coverages
- Establish a price (premium)
- Pay the claims
On Saturday, Jan. 29, 2018, I was driving down a flooded Center Street in New Iberia concerned about the aforementioned flood article and the viability of the NFIP, when I heard a brief portion of a TED talk with Cathy O’Neil titled, “The Era of Blind Faith in Big Data Must End.” O'Neil, a data scientist with a PhD., talked about data being accurate but not being fair.
Actuarial science demands objective data, but our society is starting to demand “fair.” Can these co-exist? Should bad drivers pay more than good drivers? Should health conditions be considered in underwriting life and health policies?
See also: How Advisers Can Save Healthcare
I believe insurance is a risk-sharing process requiring underwriting, but it is rapidly moving to a “social welfare” platform. The market will get what it wants or tolerates, but as shown above our traditional insurance model may be sacrificed in the process.
What does this mean in your world? Is it sustainable? What are we as an industry and a society going to do? Address the problems now or wait until these systems collapse or go bankrupt?
“A government that robs Peter to pay Paul can always count on the support of Paul.” — George Bernard Shaw
“We have met the enemy, and he is us” — Pogo comic strip
