Is Catastrophe Insurance Headed for Disaster?

Peter G. Gosselin of the LA Times describes recent changes in catastrophe insurance markets, some of which have shifted risk from insurance companies to the government and individuals. For example, in many states the government has capped the total amount insurance companies must pay to policyholders after natural disasters. In these cases, the government agrees to cover any costs over and above the cap limiting the insurance companies' exposure to risk.

But the big change is the ability of insurance companies to assess risk at the individual level to a greater degree than ever before. This allows them to design policies and rates to match an individual's characteristics. Whether this is good or bad overall is an open question. While it improves the efficiency of insurance markets in a variety of ways, if winners and losers can be predicted accurately in advance insurance markets break down because there is no way to pool risk across individuals. For example, if one out of ten people will face high losses after an earthquake, and you can tell which person it will be in advance, there is no way share the risk across these ten individuals. Instead, one will face very high costs and nine very low costs - same average, but a different distribution (all else equal, e.g. the individual who faces the high rate may take preventative measures to reduce risk lowering overall and average costs).

In addition, with individual pricing there is a worry that the poor will face very high rates and be unable to afford insurance coverage. With the ability to assess risks at the individual level and predetermine winners and losers, each individual will, in essence, enter into a savings program that covers lifetime disaster costs with an individualized monthly premium. But if those who are poor also happen to be high risk, then many will not be able to afford insurance. If so, this shifts risk to the government and to private sector agencies such as non-profits that deliver aid since they will have to step in and help to some degree after a disaster.

I think that insurance companies should be allowed to vary rates according to factors within an individual's control, but factors beyond an individual's control ought to be pooled even if they can be identified a priori. For example, the risks of being born with a costly genetic problem ought to be shared across the population even if a prenatal blood test will reveal it, while the risks from smoking ought to fall on the individual. This may be difficult to define in practice, e.g. if we expect the an unemployed person to take any job that is open or face a cut in their unemployment benefits, is the decision to move and take a job in an area with a high earthquake risk fully within the individual's control? But mostly the lines are clear and I think it's a good guiding principle:

Insurers learn to pinpoint risks -- and avoid them, by Peter G. Gosselin, LA Times: Hemant Shah is in the business of creating catastrophes. The computers at Shah's Silicon Valley company, Risk Management Solutions Inc., contain mathematical models of every U.S. disaster from the 1812 earthquake ... in St. Louis to the 9/11 assault ... in New York, as well as 100,000 synthesized "extreme events."

RMS runs its disasters through your community — and sometimes right through your home — to see how you'd fare in a hurricane, hailstorm, earthquake, epidemic or terrorist attack. The firm sells its knowledge to insurance companies to help them decide whom to cover and how much to charge.

Since Hurricane Katrina last year, those decisions have been running pretty much in one direction. Based in part on RMS' predictions, companies ... have gotten out of some lines of coverage altogether ... and ... have spent the year dropping or paring back policies... And this may only be the beginning.

"Between hurricanes along the East and Gulf coasts and earthquakes along the West Coast, it is an open question whether the private insurance industry will continue to insure the coastline at all," said University of Pennsylvania economist Howard Kunreuther, one of the country's foremost authorities on disaster.

RMS is at the vanguard of a technological revolution that's reshaping the nation's ... property casualty insurance industry. The industry ... is embracing a new generation of powerful computer techniques to learn everything it possibly can about you — or at least people very much like you — your health, habits, houses and cars. It is using this new trove of data to replace traditional uniform coverage at uniform rates with an increasingly wide array of policies at widely varying prices.

Industry executives say the aim is to create a finely tuned system in which companies can better manage the risks they bear while consumers can more carefully pick the protection they need and pay just the right amount for it.

As insurers become more adept at the techniques, "American consumers can be more assured that their companies will be there when they need them to pay their claims," said Robert P. Hartwig, chief economist of the industry-funded Insurance Information Institute in New York. ...

But some regulators, economists and consumer advocates contend that the industry's growing use of sophisticated computer-aided methods is producing side effects that could undermine the very nature of insurance.

Traditionally, insurance companies group people facing similar dangers into pools. Company actuaries determine how often events such as illnesses or accidents have befallen pool members in the past and how costly those occurrences have been. Insurers set their rates based on the frequency and loss histories...

A key characteristic of this approach is that there's an incentive for insurers to assemble pools as big as possible. The bigger the pools, ... the more accurate their frequency and loss numbers.

But the question has always hung in the air: What if insurers could ... predict who's more likely to be hit with setbacks in the future? What if they could charge such customers steeply higher rates, or avoid them altogether? Wouldn't that boost profits, making shareholders and executives happy, and ensure that insurers had plenty of cash on hand to pay the smaller claims of the safer customers?

That is the promise of catastrophe models like RMS'. And it's the promise of new "data-mining" methods that let companies use a person's income, education or ZIP code to predict future claims. That in turn encourages insurers to raise rates or refuse coverage for the very people who need it most — low- and moderate-income families, for example, or those who've suffered such setbacks as unemployment.

As the industry expands its ability to "slice and dice" customers and applicants, Texas Insurance Commissioner Mike Geeslin, among others, worries that "the risk-transfer mechanism at the heart of insurance could break down." If that happens, Geeslin warned, "insurance will stop functioning as insurance."

Rushing into harm's way?

By providing companies with so much information about individual properties and policyholders, new techniques ... are riveting insurers' attention on how choices made by individuals are raising the cost of disasters, while dampening industry interest in the kind of broad risk-reduction measures that were once a hallmark of American insurance.

The industry now contends that one of the chief reasons Katrina and other recent disasters caused so much damage — and produced such huge insurance claims — is that Americans are rushing into harm's way by moving to hurricane-prone coasts and earthquake zones like California. And one of the chief reasons, according to this argument, is that they're being subsidized by homeowners insurance premiums that have been held artificially low by state regulators.

The argument has attracted a wide following in the last year both inside the industry and out. ... The solution, according to industry leaders and many policymakers, is to let insurers charge higher rates in danger zones to discourage people from moving there, and to make those who live there pay for the additional risks they run.

The problem is that some key statistics don't seem to support the argument. Though government statistics do show various sorts of growth in the nation's danger zones, they don't show it occurring at an appreciably faster pace than for the country as a whole. ... What this suggests is that rising disaster damage and costs are more a function of demographics than insurance rates.

"You simply cannot make the case from the numbers that America's coastal counties have grown at a disproportionately faster rate than the country as a whole over the last 25 years," said Judith T. Kildow, who runs the largely government-funded National Ocean Economics Program at Cal State Monterey. If anything, Kildow said, "the numbers show that growth is now greater inland." ...

Of course, the latest round of rate hikes and coverage cutbacks is not RMS' handiwork alone... Indeed, many of the recent changes are extensions of ones begun after the nation's last major run-in with natural disasters, including the 1989 Loma Prieta earthquake in the Bay Area, the 1991 Oakland firestorm, 1992's Hurricane Andrew in Florida and the Northridge earthquake in 1994.

Those disasters destroyed tens of thousands of homes and uprooted hundreds of thousands of people. They also scrambled the finances of many insurance companies... The industry responded by seeking state help and changing the terms of homeowners policies.

After lengthy political battles with state regulators, insurers were effectively relieved of responsibility for covering the wind and quake dangers that had just cost them so dearly. Those jobs were shifted to a set of state-created companies and agencies.

In California, the insurers were no longer required to sell earthquake insurance as part of their homeowners policies. Henceforth, most homeowners would get that coverage from the California Earthquake Authority. ... CEA's creation effectively capped the amount that the industry could lose to quakes at a comparatively modest few billion dollars.

In Florida, the state set up a fund to provide insurers with low-cost insurance of their own to help cover wind damage claims. In addition, Florida officials established what eventually became Citizens Property Insurance Corp. as a home insurer of last resort...

The industry's other response was to begin changing the language in homeowners policies. Industry executives maintain that the changes have been solely intended to clarify what companies cover. ... But regulators say many of the changes have shrunk the protection that policyholders get.

"Insurers are taking on a helluva lot less risk than they used to," complained California Insurance Commissioner John Garamendi.

The story of a single change illustrates the gulf that has opened between what insurers say they are selling and what most homeowners think they are buying.

When the late-1980s-to-early-'90s disasters hit, the gold standard for homeowners was the "guaranteed replacement cost" policy. ...[R]egulators interpreted "guaranteed replacement cost" to mean that insurers had to replace a destroyed home essentially no matter what the ... expense... And most policyholders — both before and since the '80s and '90s disasters — have assumed that this is the kind of coverage they purchased. ...

After the 1991 disaster, companies began dropping guaranteed replacement cost policies in favor of similar-sounding but substantially more limited "extended replacement cost" ones. Under the latter policy, an insurer is obligated to pay only up to the dollar amount ... plus, typically, an additional 20%. By now, industry executives say, the former type of policy has all but disappeared.

The problem is that few policyholders understood what was at stake in the word change. Encouraged in part by industry advertising, they continued to believe that their insurance would replace their houses if they were destroyed. ...

[P]olicyholders had better prepare themselves; more changes are on the way.

Breaking tradition

Give RMS a street address almost anywhere in the country, and it can pull up what's at the location, and tell you when it was built and out of what. Then it can run hundreds, sometimes thousands, of simulated disasters across the structure. ...

At the same time, so-called data-mining companies use years of insurance company data to generate a computerized library of correlations between claims and such personal attributes as income, education, ZIP code and credit score. That library can then be used to predict whether that person will file a claim in the future. ...

RMS' techniques and those of the data-miners share three crucial similarities: They're only possible because of recent advances in computing power. ... And they have set off a mad scramble among insurers to slice their once-broad pools of policyholders into finer risk categories.

Northbrook, Ill.-based Allstate now sorts its home and auto policyholders into 384 categories, up from the three that it used until a few years ago. At Bloomington, Ill.-based State Farm, the nation's largest auto and home insurer, the number of categories the company uses has increased 100-fold. At Cleveland-area-based auto insurer Progressive, the number runs into the millions.

Insurance executives say that the rush to refine is producing positive results. It gives companies more detailed information about the risks they bear; allows them to offer lower rates to, for example, homeowners who live in safe places; and lets firms individualize policies to fit each policyholder's needs. ...

But the ever-finer slicing appears to be having other effects as well, ones that worry a variety of regulators and insurance theorists.

States like California and Maryland have banned insurers from using credit scores, ZIP codes and other factors in deciding whether to cover someone, arguing that they unfairly discriminate against the poor and minorities. Washington state officials complain that the proliferation of categories and risk factors has so confused policyholders that the state now requires a company to provide customers written explanations whenever it gives them anything but its best rate.

"If I have a lot of house fires, [insurance companies] should charge me more," said Washington state Insurance Commissioner Mike Kreidler. "But when insurers reach and grab information like credit or occupation or education, people say, 'Wait a minute. I thought we were talking about insuring my home or auto. What does occupation or education have to do with it?' " ...

Perhaps most broadly, the new techniques appear to be dismantling much of what insurance traditionally has been about. Until now, insurance of almost every type has performed two key functions.

The first is pooling. Anyone buying an insurance policy is, in effect, kicking into a pot that covers the cost of future bad events befalling a few of their number. The second is providing cross-subsidies. Some buyers are more likely to get nailed by bad events because, for example, their genetic makeup leaves them prone to disease or their houses are not built to the latest code, and others are less likely.

But for the most part, insurers have not known which policyholders fall into which category, so they have charged generally uniform rates, which means that those in the "more likely" category get a subsidy by being able to pay the same as those in the "less likely"...

However, as disaster models such as RMS' and data-mining provide companies with increasingly detailed knowledge about individual policyholders, there are fewer and fewer pockets of such ignorance and therefore less and less room for cross-subsidies.

"Insurers are squeezing subsidies out of the system across the board, and they're going to carry it absolutely as far as they can," said Columbia University economist Bruce Greenwald.

On its face, the trend might seem a positive one. Among other things, it means that policyholders with good genes and safe houses can enjoy lower rates. But at least in some cases, Greenwald and others argue, the end of cross-subsidies spells trouble.

In the case of healthcare insurance, it would mean that a substantial fraction of the nation could no longer afford coverage. In the case of homeowners insurance, it ultimately might mean that large swaths of the nation's coasts become unaffordable for all but the wealthiest Americans who can bear unsubsidized rates.

And this may not be where the dismantling ends. Some analysts say that the same kind of modeling and data-mining that's helping companies squeeze out cross-subsidies could end up squeezing out much of the pooling in insurance as well.

As insurers use the new techniques to get ever-more-refined estimates of what individual policyholders are likely to cost in the future, they may be tempted to charge people closer and closer to full freight for treating an illness or rebuilding a fire-damaged home. Then even those who benefited from the end of cross-subsidies could see their rates go up as they effectively are asked to pay their own way, rather than share the cost by pooling with others.

Industry executives argue that competition among insurers will prevent such an eventuality. "I don't think you're ever going to get to the extreme of no pooling," said Greg Heidrich, senior vice president of policy with the Property Casualty Insurers Assn. of America, one of the industry's largest trade groups. But regulators are not as confident.

"When you begin to tailor or refine policies," said Alessandro A. Iuppa, president of the National Assn. of Insurance Commissioners, which represents the nation's 50 state insurance departments, "you could end up with people basically covering their own losses."

But that, of course, would not be insurance. ...

Comments

[Idaho_Spud]

Modern insurance: They get your premiums year after year and never have to pay out a nickel in claims.

If you really need insurance due to actual (gasp) risk, they either don't offer it, or it's hideously expensive. Or it's both very limited and hideously expensive - as quake insurance is in CA.

Definitely a low-risk business to be in. There's a reason Buffet owns Geico.

[trader walt]

As long as insurance can identify high risk individuals and can refuse them coverage, they will avoid covering them.This forces the government to the assume losses when they occur. What's worse, as Paul Krugman and Robin Wells pointed out in they analysis of medical insurance, the cost of administering these private insurance programs may be higher than a comprehensive government program because private companies spend so much money identifying those high risk people and situations to whom they deny coverage and shifting high risk claims to the government program.

[evagrius]

Considering that insurance is really a form og gambling, one could argue that the insurance industry is now playing with a marked deck of cards or a fixed roulette wheel.

[Carolyn Kay]

I have an idea for handling risk in health insurance that I've sent to my congressman, since there's a real chance that Congress will be looking for fresh ideas. The two-tiered structure could be applied to other types of insurance, as well. Here's what I wrote:

Health insurance will be one of the first issues addressed by the new Congress, and I think my idea for how to structure it has a good chance of appealing to some Republicans and perhaps, even, a newly (at least seemingly) chastened George Bush.

My idea will make health insurance more affordable without cutting out insurance companies altogether, which seems to be a step too few politicians are willing to make. I prefer a universal system, but since entrenched powerful interests are dead set against that, here's a possible compromise.

Insurance companies have made it perfectly clear that they don't want to cover people with catastrophic illnesses. So let's take those illnesses out of their hands altogether. Let's come up with a list of diseases to be covered by a standard package, maybe the list that the state of Oregon developed for its universal coverage. Insurance companies could bid on this package, with additional features (but not illnesses), and individuals and employers could choose the company that suits their needs the best.

This idea should bring down the cost of the basic package to an affordable level for most people. Those who can not afford it, however, should be covered by a combination of federal and state government contributions, as Medicaid is now. The same federal agency that provides free coverage for those who can not afford the insurance should allow individuals and businesses to participate by paying a monthly fee. In other words, that agency could act as an insurance company for those who want to obtain their health insurance in that way. If that provision is impossible to pass, then at least let those of us over the age of 60 buy in. We have a terrible time finding any insurance at all, and when we do it's prohibitively expensive.

Above the basic plan there could be a superinsurance fund. All who are covered (by their company, by themselves, or by the government) would pay into the super fund to cover catastrophic illnesses. This plan could be administered by an insurance company or by a government agency. The per-participant premium for this insurance would very likely be quite low if it were a nationwide program.

Members of Congress would gain a huge amount of good will from the public if they agreed to be covered by exactly the same plan as the rest of us, especially if you were to pay the premiums out of your salaries.

Carolyn Kay
MakeThemAccountable.com

[RW]

One of Krugman's points is that a significant percentage of insurance company overhead is dedicated to _avoiding_ paying claims, the paradox being that insurance companies must not only spend more and more doing that in order to remain profitable but must increasingly engage in practices that are not really insurance; e.g., individualizing coverage and elevating premiums based on individual rather than pool parameters essentially converts an insurance policy into a mortgage.

It's all part of the 'tragedy of the commons' and points to a fundamental flaw in most market approaches to allocating essential resources such as catastrophe and health insurance, infrastructure, etc., relevant to the public good: The overwhelming impulse is to privatize profit and make liabilities public. Policies that accept that reality and develop social structures to ameliorate it have some chance of success; all others will fail.

[aargh]

Yea! Get rid of all "cross subsidies"!

Those of us who believe that insurance is, as it is meant to be, only about pooling individuals of similar risk, celebrate this evolution in coverage.

Those who lament the decline in "cross-subsidies"(!) have a dim view of individuals. Individuals can ALWAYS do something about the risk pool they are in!

Those with gene "defects" can have smaller families and hurricane alley dwellers can put boards on their windows! Good insurance markets and good public policies will retain these signals and incentives for INDIVIDUAL action.

I pray that, somewhere out there, this article and the above commentary are kindling the flame in the heart of some young economist who pick up our departed Milton Friedman's torch -- otherwise the "nanny state" grows unchecked.

[anne]

Actually, Berkshire Hathaway is the largest catastrophe insurer in America. I always describe Berkshire as primarily a super-catastrophe insurer, which is Warren Buffet's term and, at times, description. The question is properly pricing for the inevitable catastrophe, which Berkshire always does but others often do not. Competition drives down premiums, so that losses are too large in answering claims, so companies other than Berkshire repeatedly ask for protection or stay away from prime risk categories. Berkshire does not compete in price, so the company is always there.

[anne]

Notice, by the way, how Berkshire has grown just when claims against it have been the largest over the years. The claims are honored readily, and there is always an asset base to issue additional policies at fair prices when other companies are unable or unwilling to. Learning how Berkshire works is a revelation in learning about insurance. A terrific ethical-responsible company.

[Adrasteia]

is the decision to move and take a job in an area with a high earthquake risk fully within the individual's control?

Yes. There are hundreds of years of seismic records, and earthquake construction and seismic retrofitting are well established sciences.

If individuals choose to take the risk of building in the wrong location with the wrong materials, insurance companies should absolutely be allowed to price in that risk.

[Richard]

"I think that insurance companies should be allowed to vary rates according to factors within an individual's control, but factors beyond an individual's control ought to be pooled even if they can be identified a priori."

That's been my conclusion as well. Earthquake and hurricane prone areas should not be subsidized over time, but penalizing people for their genetic dispositions -- well, you can live elsewhere, but you can't get another body.

I wonder about the credibility of some of these programs. Drilling down at such a fine level produces cell sizes quite small; I'd think that the (statistical) credibility would be quite low.

[aargh! again]

Richard

...here's to hoping you and others will reach a different conclusion:

1) extend your earthquake logic a bit and you'll realize that we "subsidize" people with genetic predispositions (and behavioral habits) in exactly the same way -- the fact is, people with predispositions can make lifestyle and family planning choices to mitigate

{even in the case of, say, breast cancer, the predisposition for which can be observed in family genetic histories and by the BRCA1 gene test, a woman -- when learning she has it -- can take extreme measures to avoid contributing or triggering factors}

Sadly, there was a case of a doctor -- in the Northeast, I think -- that had a habit of telling his patients the blunt truth, "Stop smoking!" or "Lose weight!" and he got in trouble for it, making the national news.

2) mathematics and portfolio theory will tell you that insurance companies can manage the overall statistical "credibility" even with smaller MORE ACCURATE cells which might also have higher individual variances

...please don't buy into the "penalized" victim stuff

it reminds me of the reality TV show I watched last night -- DR. 90120 plastic surgery show -- where the morbidly obese young woman -- limited to only 5 liters of liposuction fat withdrawal off her thighs -- voiced her disdain for those who would give her a hard time for eating a cheeseburger afterward... she ought to wear a muzzle?

[Bruce Wilder]

"I think that insurance companies should be allowed to vary rates according to factors within an individual's control, but factors beyond an individual's control ought to be pooled even if they can be identified a priori. For example, the risks of being born with a costly genetic problem ought to be shared across the population even if a prenatal blood test will reveal it, while the risks from smoking ought to fall on the individual."

Distinguishing between "within control" and "not within control" strikes me as an invitation to the kind of moralistic meddling, that I usually depend on economists with a libertarian bent to resist.

If you know a priori, you know a priori, and that information should be utilized. The ability to control is a technical problem to be solved, and if a priori information is fully utilized, the incentives to develop control will be correct.

I don't find the "prenatal blood test" example to be at all persuasive regarding Mark's argument. Hello, abortion! That's control. It may not be pretty, and it may not be the narrative favored for the plot of a Lifetime Movie of the Week, but it is a legal option, and the existence of that option is why people get prenatal tests.

[Adrasteia]

{even in the case of, say, breast cancer, the predisposition for which can be observed in family genetic histories and by the BRCA1 gene test, a woman -- when learning she has it -- can take extreme measures to avoid contributing or triggering factors}

Unfortunately we don't yet have enough data to determine what those 'extreme measures' should be, although large tamoxifen, raloxifene and aromatase inhibitor studies are still ongoing. What is known is that early intervention against cancer is orders of magnitude cheaper than tackling it once it spreads.

Insurers will most likely require those with the BRCA1 gene to take DM screenings regularly, possibly even every six months. I think this is probably fair, although I'd consider the merit of passing on the costs of preventative screenings for all major diseases to the taxpayer.

[fiskhus jim]

If only we can prevent customers from successfully asserting their contract rights...

...then Insurance can become the windfall protection racket it was intended to be.

[georgist]

If you know a priori, you know a priori, and that information should be utilized.

The real problem is that knowing things "a priori" is very expensive, and all society gets to show for that expense is some zero-sum cost shifting.

[anne]

{even in the case of, say, breast cancer, the predisposition for which can be observed in family genetic histories and by the BRCA1 gene test, a woman -- when learning she has it -- can take extreme measures to avoid contributing or triggering factors}

Idiocy is idiocy.

[callahan]

Tired of questions, ... I want answers.

http://www.loudobbs4president.com/

[Mike O'Bryan]

Come on! I'm a typical selfish, mostly stupid and arrogant American. I want something for nothing, and I sure as heck want something back if I'm cutting a cheque against my well-earned bank balance.

For example, my several-hundred-dollar auto insurance policy is mandated by state law. I pay it without hope of return against my car's worth of a very few of those half-annum premiums. If my assessed risk should increase because I have an accident and cause a claim, those premiums will increase until the costs of that claim are reclaimed. The only money that ever leaves the policy pot-o'-gold goes to the shareholders and the greedy vendors of the claimants.

As for the medical arena, the reality posed in Andrew Nichol's "Gattica" is well on its way. Within 25 years, the cost of a complete personalized gene map will be well under $1000; the escalating ease of identity capture, matched with the greed of the for-profit policy issuers virtually ensures "uninsurable" as a branding that will impose a new class structure upon our society.

I wonder how my participation and feelings would change if I had personal ownership in a co-op of members and their equity. What if a much smaller portion of my paid premiums went toward covering claims against an annuity in which I had personal ownership, an annuity to which I pledged contribution throughout my life? What if the majority of those premiums went into that annuity? I wonder if my typical American behavior would become more responsible.

Today I pay my medical expenses out of pocket. Before my doctor's appointment setter even checks for availability and asks me to confirm my insurance provider, I answer "private pay". As a result, I have very direct involvement in the options my doctor proposes: I'm the one who will have to pay for the results of those decisions.

I would submit that we are several steps along the path toward direct personal cost and total privatization of profit: insurers will collect the premiums and pay no claims. How long will it be before we wise up and take back our well-earned cash and manage it ourselves?

[aargh! again]

Good news, Anne: You don't have to be the idiot.

read, for instance, breastcancer.org, "Changes You Can Make To Lower Your Risk"

ah, heck, google ""breast cancer" prevention" and read what you find then share it with your mother, sisters, and female friends

this will make an object lesson in how changes in personal behavior can mitigate "propensities" and "predispositions"

skip the ad hominem

[anne]

{even in the case of, say, breast cancer, the predisposition for which can be observed in family genetic histories and by the BRCA1 gene test, a woman -- when learning she has it -- can take extreme measures to avoid contributing or triggering factors}

No insurance for you, sweetie. Yes; idiocy is idiocy.

[ramster]

When I buy insurance, I'm essentially paying the expected value of an undesireable outcome that I'm insuring against (e.g. the 0.1% chance that my $500000 house will burn down in a year = $500) plus a profit margin to the insurance company. I pay this margin to avoid disasterous cost of the unlikely outcome (house burning down). The fundamental concept here is that the outcome is probablistic.

So what the article is really talking about is the insurance industry getting a better handle on these probabilities and setting the prices accordingly. Of course, this will ultimately yield no benefit since if some people are underpaying for insurance, it seems likely that others are overpaying. As the tools get better, the overpayers are going to start demanding price cuts (i.e. why the hell isn't the cost car insurance a function of exactly where and how much and how fast your drive; hello...GPS).

This is where the whole concept of health "insurance" is fundamentally bogus. Other than the few who die of accidental death at a young age, most of us will incur a significant health care cost over our lives with 100% certainty. You may die of lung cancer due to smoking cancer at 60. You may die in your sleep in a hospice at 95 but had a hip replacement at 70. Whatever. I suspect that cumulative lifetime health care cost per person doesn't actually vary that much (maybe +/- 25%, with the exception of people with some weirdo diseases that have sky-high treatment costs). So the insurance model and carving out narrow constituencies who will be priced differently doesn't work. Everyone will have significant health costs at some point.

Finally, if the insurance industry really thinks it can ultimately make everyone cover their own losses, than what is the justification for its existance?

[aargh! again]

Mike: "How long will it be before we wise up and take back our well-earned cash and manage it ourselves?"

Hopefully sooner rather than later, as our system is broken and we've made public promises that will NEVER be kept (Social Security, Medicare, Medicaid).

HSAs (health savings accounts) might be illustrative of a big step in the right direction. Were one to have such an account in childhood and to make regular small contributions, it should be a small matter to create a pool of funds sufficient to "self insure" the individual for life, particularly if it were coupled with an extremely high deductable catastrophic insurance policy...say a $25K annual deductable, which would cost pennies a month.

But you see, the people who would want this setup -- who would "self select", in insurance parlance -- would be those very people who would do the kind of healthy behaviors and lifestyle changes suggested to Anne, above. (Oh, and HSA account balances can be taken out and used when you retire!)

This reveals, perhaps, what is the true motive of many of the commentors on this page: They want the insurance system not merely to function to pool people of like risk but rather to serve as a social insurance, to transfer income to those less fortunate.

This motive is what "breaks" the system: Look all around you and note the rash of unhealthy behaviors and lifestyles -- people are increasingly insulated from (most, not all) of the consequences of their personal choice. So, the responsible ones try to pull out of the system as much as they can -- because they are footing the bill! That insurance companies should want to serve THESE people should come as no surprise.

And, no I am not insensitive or cruel. I merely want income transfers to be as effective and transparent as possible -- and to incent "better" behavior. So, let's have a negative income tax for the poor to fund their HSAs and catastrophic insurance policies. The goverment can -- rather than meddling in health care provision -- use its mouthpiece and the public schools to promote good choices. (Remember the "Presidential Fitness Campaign")

What we all should fear is that the "income transfer" crowd get single payer or nationalized health care. This will do little to realign personal incentives BUT it will lower the overall quality of care and restrict access to it for people like you.

b.t.w. given your "self pay" situation the thing you (and all HSA holders) should lobby most for is transparency of medical care pricing, so you know what different "prices" exist out there and you can shop around

By extension, it would be cool if markets like this could exist for home and car insurance too -- I, for one, have paid for decades of car insurance with no claims. Had I that money in an ASA ("auto savings account"!?), I would have all that money, rather than subsizing other drivers and paying insurance company wages & profits.

...play this out to its logical extreme (health, auto, home savings accounts) and you get, yes, SAVINGS!! People should save for rainy days AND behave in ways that preserves their savings! :)

[piglet]

"Idiocy is idiocy."

Nobody could have said it better, anne.

"the ability of insurance companies to assess risk at the individual level to a greater degree than ever before"

I am not convinced. This is what they claim, but we have no way of telling. E.g. genetic tests. They are simply unreliable. (http://www.abc.net.au/science/news/health/HealthRepublish_934272.htm, http://www.healthmatters.org.uk/issue46/unreliableevidence,
http://www.webmd.com/content/article/125/116060.htm)

Discriminating against groups of people because of some house number resulting from a barely understood DNA test is what some insurance companies would love to do, and it doesn't matter much to them whether there is a connection between the house number and the actual risk or not. I think what a powerful motivation for insurers is the wish to affirm their power. Power to choose, to pick, to evaluate, to refuse. To play God, maybe. If there are strict industry-wide regulations against cherry-picking, no company loses out and the whole industry actually becomes more efficient, as Paul Krugman has pointed out. Yet Insurers nowadays seem so eager to discriminate. I don't think it makes much economic sense. I think there's something else.

[Carolyn Kay]

>>Individuals can ALWAYS do something about the risk pool they are in!

Oh, right. Only one of my great aunts had ever had breast cancer on either side of my family, and during my lifetime the ideas about what caused cancer went from "It's God's will" to "It's all your fault", so I was supposed to know I was going to get breast cancer, and I was supposed to know what to do to prevent it?

Honestly, I think some of you live on a different planet from the rest of us.

Yes, insurance is about pooling risk. Sounds like some people are so afraid of any type of common effort that they'd like to abolish insurance altogether. For all of us. Just because they THINK it causes dependency.

Maybe stupidity causes brain cancer.

Carolyn Kay
MakeThemAccountable.com

[aargh! again]

Carolyn

I -- and others here I’m sure -- are sorry that you got breast cancer.

That was an unfortunate outcome for which there was a probability forecast for its occurance before you got it. Today, the ability of science and medicine to make those forecasts is better than ever before (Yes, Piglet, the tests aren’t perfect, but they’re darn good and getting better every day!)

It has been medical practice for a long, long time to ask patients about their family medical histories, so assuming you got to go to a doctor when you were younger, you too had an opportunity to learn of your genetically-based, higher-risk profile. And, as covered before, there were and are things you could have done to lower the probability that the forecast becomes an outcome, that is, actual breast cancer. (Of course, this doesn’t guarantee you won’t have that outcome.)

It is only reasonable, and in fact expected, that medicine and insurance will use new science and new data to pool people of similar risk – and it is just good “horse sense”. By identifying those people, who like you, were at higher risk, the market can send them a price signal – higher insurance rate in THEIR pool – to get them to change behaviors. If nothing else you, for instance, could have saved more, for your higher expected lifetime health bills.

But all this reasoning with you is in vain, I think. I read on your website personal profile that you use to read Ayn Rand. I think you gave up too soon. It is tiring for me to try to put forth a different idea to you or others who are content with tossing out platitudes, like “stupidity causes brain cancer”, or “idiocy is idiocy”. These are better suited for bumper stickers or T-shirts at your local vegan street fair. They add nothing to the quality of discourse in a “public square”, like this one.

[anne]

"By identifying those people, who like you, were at higher risk, the market can send them a price signal – higher insurance rate in THEIR pool – to get them to change behaviors."

Idiocy and meanness are idiocy and meanness.

[anne]

Nicely expressed, Carolyn.

['nuf said]

In late September, just as the present academic year was getting underway, The American Civic Literacy Program at the Intercollegiate Studies Institute released its report The Coming Crisis in Citizenship: Higher Education’s Failure to Teach America’s History and Institutions.

Students attending expensive schools do not generally score higher on the survey. In a fascinating finding, seniors at several schools with strong public reputations, such as Berkeley and Johns Hopkins, score noticeably worse than freshmen on the same campus—a phenomenon clinically labeled "negative learning."

Veritas, Anne?

[anne]

http://www.thecrimson.com/printerfriendly.aspx?ref=514624

October 2, 2006

A Crisis of Citizenship? Encouraging participation, not mandatory civics courses, is the answer.
By THE CRIMSON

A nation in which a voter turnout of 60 percent is considered exceptional is not one sufficiently concerned with the health of its democracy, and America’s colleges and universities may be at least partially to blame. The Intercollegiate Studies Institute (ISI), a conservative education think tank, suggested as much in its recently released report, entitled “The Coming Crisis in Citizenship: Higher Education’s Failure to Teach America’s History and Institutions.” Although the report uses attention-grabbing language to highlight what it has deemed a failure of higher education, the ISI fails to convincingly support its central recommendation: that improved (and required) college civics courses are the best solution to the problem it has uncovered.

The ISI offered a 60-question survey to 14,000 students at 50 colleges and universities. The questions, which were not publicly released on the Institute’s website, address four topics: American history, government, America’s role in the world, and its market economy. We are unconvinced, on the basis of its study, that the ISI has uncovered a true crisis. It is extremely difficult to determine what comprises a substantial understanding of our nation’s history and government; there is no reason to believe that correctly answering fewer than 60 percent of the ISI’s questions––the average score was about 52 percent––is evidence of true civic illiteracy, and not of unreasonably difficult or obscure questions. Although Harvard’s score of almost 70 percent was the highest of all schools surveyed, seniors’ scores reflected less than a 2 percent improvement over the performance of freshmen, and the ISI noticed relatively poorer senior scores, with respect to freshmen, at 16 of the schools it surveyed. This relative stagnation or decline, however, may simply reflect that, yes, college students forget some of the facts and dates they memorize in high school....

[anne]

And we should be the least concerned about a secret supposed ISI study on citizenship, likely citizenship for Republicans, why?

[piglet]

I found Our Underachieveing Colleges, by Derek Bok, an interesting read. It has a chapter on Preparing for Citizenship. He's not a right winger and his conclusions are quite careful.

That ISI would keep their questionnaire secret is quite embarassing. The "negative learning" result is a giveaway.

[Carolyn Kay]

aargh! again,

You're not asking for quality in public discourse, you're asking for capitulation to your beliefs. How could I have learned of the risks of breast cancer when I was younger, when NO ONE KNEW back then what the causes were? I don't care if you have ten medical degrees, you can't tell anyone even right now whether they are certain to get it.

And here's the problem with all this statistical crap. Tell me all you want what my chances are of GETTING breast cancer, but I can tell you as one who had it, when you've got it, YOU HAVE IT 100%! Walk an inch or two in my shoes before you throw moralistic mumbo jumbo at me.

I stopped reading Ayn Rand and her acolytes because their pronouncements don't reflect reality. Their beliefs have nothing to do with who we are as human beings. The book I'd write, if a female could get published, refutes Rand and all others who make the mistake of thinking that Adam Smith preached that selfishness is good.
http://makethemaccountable.com/balance/

Thanks Anne,

Carolyn Kay
MakeThemAccountable.com

[anne]

Thanks, Carolyn.

['nuf said]

Wow, Carolyn! You've got your work cut out for you!

I, for one, believe that if you DO, in fact, have ideas worthy of being published, they will be -- whether or not you are a woman.

But I suspect your ideas -- which you never put forth -- aren't worth printing. This suspicion is at least partly based on the fact that you'd be taking on most of the leading thinkers in science, philosophy, economics, and religion -- past and present.

{These range today, from the Dalai Lama, who FREELY admits that Buddhism is founded on enlighted self interest, all the way to Darwin's modern adherents including Richard Dawkins ("Selfish Gene") and Stephen Wolfram ("New Kind of Science")}

No, I think your assertions are based -- almost entirely -- on your feelings. This blog and most of the commentors do a pretty good job of keeping theirs in check. You don't, leading to the "littering" of the aforementioned "public square".

I had higher hopes for Anne, who might be both young and in college, so hopefully her mind is still open. {The "cut and paste" was bait for her, which she took, to respond, it was hoped, with her own argumentation. But at least her "cut and paste" was decent. Then, sadly, she reverted back to "kumbaya" mode.}

Just for fun, Anne and Carolyn, take the opposite points of view some times, and argue those -- it works in debate training, and it might work here!

Thanks y'all!

[anne]

Oh dear; there is always something curious about going after a woman on being emotional, something that men never are or could be except when they are which is mostly, not that there's anything wrong with it.

Carolyn, of course, points out the strangeness and historical meanness of blaming the ill and shunning the ill for being ill. Since the lesson has still not seemed to take after all these centuries of teaching though, the lesson is always welcome when taught freshly. I, then, thank Carolyn for the lesson and welcome more and the more emotional the better for being a woman I can understand that, you know?

[anne]

The idea really is quite bizarre, we will do genetic screenings of women to prevent them from messing about in health care insurance pools. Women found genetically unfitted, can just learn to live better. But, better than whom? No insurance for, you, Sister!

['nuf said]

Anne

Let's frame it this way:

2 possible extreme worlds

one where all possible science is used to understand individuals' variations and to price the (future) cost of the insurance for their care accordingly

and one where science that could be used to understand individual variation is repressed or made illegal and all individuals are (even forcibly) pooled blindly and assessed roughly the same cost of insurance -- even while science knows that the costs will vary widely

i, for one, would chose the former, as society retains all the helpful signals and incentives for optimal individual and collective behavior AND at the same time, can use other regimes to transfer income -- AID -- to the less fortunate, thru, say the tax system

i believe too, the "second world" is doomed, for it divorces individuals from the consequences of their actions and inactions and ultimately results in ballooning expense for care UNTIL such time as a majority coerces every individual into the pool THEN care is, rather randomly, rationed

today, less than ideally, we tread water between these two worlds

you, Anne, needn't put all that stuff about women in your writings -- all these points apply equally well to men, and, in fact, they are likely to fare worse in your GATTACA-esque world of gene testing -- it just weakens your argument

warmly, i propose: let's judge YOU based on the strength of your ideas, not on your sex -- isn't that, after all, what (we all) women have been fighting for?

...with that, your apology for Carolyn deserves no reply

[evagrius]

'nuf said;

"These range today, from the Dalai Lama, who FREELY admits that Buddhism is founded on enlighted self interest,"

What an idiotic statement. Buddhism argues that there is NO SELF.

So- how can one be "self-interested" when there is NO SELF?

The delusions some people have!

['nuf said]

OK, evagrius -- not for you, but for the benefit of others who might be reading -- I'll take your slanderous bait.

Perhaps you do not know how to use google or are too lazy to do so, preferring instead to waste all of our time by jumping first to your keyboard blirt.

Were you to take 20 seconds and google, say "enlightened self interest", you would find a gem like this:

"... 19th century Patrul Rinpoche suggests:

"Think of someone in immense torment - a person cast into the deepest dungeon awaiting execution, or an animal standing before the butcher about to be slaughtered. Feel love towards that being as if it were your own mother or child."

It is then recommended that we repeatedly imagine, not merely that this unfortunate person or animal has been released from suffering, but that we ourselves have released them.

These startling recommendations - light-years removed from the strategies for achieving happiness promoted nightly on TV - are based on the idea that repeated reflection on suffering, and on ourselves relieving that suffering, has the effect of strengthening our concern for others. And this, in turn, it is argued, has the effect of strengthening conditions of mind that are conducive to happiness - kindness, compassion, generosity, patience, equanimity and affection - while weakening conditions of mind that are conducive to depression and despair - greed, hatred, self-obsession, jealousy, boredom and dissatisfaction.

Ultimately, it is argued, personal happiness, and the happiness of those around us, is best achieved by reducing excessive concern for ourselves and by replacing it with sincere concern and action for the benefit of others. Notice that this concern is +not+ recommended as some kind of worthy, stoic self-sacrifice, but is claimed to involve a very real increase in everyone's happiness, our own included."

perhaps the lesson of which you remind us, evagrius, is this: a LITTLE bit of knowledge, even when it comes to Buddhism, can be dangerous in the wrong hands.

[evagrius]

'nuf said;

You still don't understand....and I won't bother with explaining.

Instead, I suggest you read some Nagarjuna. If that's too difficult, read the Dhammapada.

I'd suggest you read a liitle Dogen, perhaps some Hakuin.

A little knowledge is a dangerous thing. In your case, it's a virtual nuclear bomb.

['nuf said]

yes, and none of those works refute the point: the choice to "eliminate the self" as being driven by "enlightened self interest"

you do hope to inveigle

but you brought an umbrella to a fencing match!

the only "boom" is your ego

[evagrius]

How can there be a drive to eliminate the self when there is no self?

You really don't get it.

The point in Buddhism is not to eliminate the self- there is no self to eliminate. That's the entire focus of Buddhism.

Just as in Christianity- to find one's true self one must lose the self.

But those mired in egoism can't ever see the paradox, let alone experience it.
By the way, have you read any of those works?

Who is Dogen?

['nuf said]

sadly now you stoop to:

1) mere semantics to (vainly) struggle to make your point ...why don't you retype my assertion so you can at least be happy with what you claim to defeat!

maybe something like, "those who have not, as of yet, learned that there is NO SELF may be driven to seek such learning such that they can be free from the delusional belief that there is a SELF", or whatever, evagrius

the relevant point, and that which you still don't address, is the MOTIVE for seeking -- liberation from suffering. Your failure to address my point won't make it go away! Sad, i know.

2) self righteous -- downright silly! -- tactics like squealing "my dad can beat up your dad!" that we were supposed to have left on the gradeschool play yard (that is, i won't play your silly game, evagrius, telling you where i claim to have gone to school or what i claim to have read!)

perhaps your "...mired in egoism..." comment holds the mirror up to you.

perhaps you've failed on your quest -- most certainly inspiring by an earnest desire to be happier! -- to embrace Buddhism's noble truths and practice some of the compassion it preaches!

...or you may merely be yet another one of the legion of smug narcissists drawn to read Buddhist texts at the end of some nihilistic path of discarding all the institutions of your childhood. If this is the case, then you have won the MOTIVE argument, and i will gracefully concede

[evagrius]

'nuf said;

You're very funny. By the way, exactly what was it that you wanted to argue?

['nuf said]

most of the above comments -- which you may read -- are an attempt to shake the following tripe off our collective boots:

"I stopped reading Ayn Rand and her acolytes because their pronouncements don't reflect reality. Their beliefs have nothing to do with who we are as human beings. The book I'd write, if a female could get published, refutes Rand and all others who make the mistake of thinking that Adam Smith preached that selfishness is good."

Even if, stupidly, i waded into the codswallop;

even if, as dilettante, i have failed to demonstrate that nearly all our "advanced" thought is built on notions of enlighted self interest;

i have learned, yet again, that frolicking about, in folderol, is fun for a tick or two but, in the end has no future!

[evagrius]

'nuf said;

What's "enlightened self interest"?

[evagrius]

I guess 'nuff said's self has vanished.:)

[Carolyn Kay]

'nuf said,

Naturally, you didn't read my book proposal. But you just know it can't have anything worthwhile in it.

You prove just why it is that women can't get published.

Carolyn Kay
MakeThemAccountable.com