Map of life expectancy at birth from Global Education Project.

Thursday, April 13, 2006

Boooooooooorrrrrrinnnnnng . . . .

Yup, I'm talking about insurance. Hartford, once the "Insurance Capital of North America," was not so much celebrated as mocked for that distinction. "America's file cabinet" was one popular epithet.

It's painful I know but I'm going to press on. As you will recall, in our last episode, we discussed Fred's Insurance Company and his problem with people buying life insurance because they figured they were about to shuffle off this mortal coil, whereas people who figured they had plenty of time left to make their fortune and write their novel weren't likely to pony up. That is called adverse selection -- people who really need the insurance are more likely to buy it, which is not good for John Hancock's profits.

As a commenter pointed out, another problem that Fred has is called Moral Hazard. Basically, if you know you have fire insurance, you might not be as diligent about fire protection. You might not be as inclined to buy fire extinguishers, to clear the brush from around your house, to make sure your chimney is cleaned, etc. Of course you have other incentives not to let your house burn down -- danger to life and limb, loss of articles of sentimental value, major inconvenience. But on the other hand, if your house is old and crummy, or you can't pay the mortgage, you might be tempted to set a fire -- the ultimate form of moral hazard. Most people with life insurance won't be more likely to die because they have it, but people who are desperate about being unable to provide for their families might -- as in Death of a Salesman.

Note that we still haven't said anything about health insurance. As I said before, health insurance isn't actually insurance, at least not if that term is supposed to refer to the kind of product we have been discussing. Unfortunately, a lot of supposedly smart people, including the denizens of conservative think tanks and the Republicans in the executive branch and the Congress, are confused because health insurance and fire insurance have the same last name. They know all about the moral hazard problem, so they think it must be a big problem with health insurance. Therefore, they want us to have high deductibles in our health insurance policies so that health insurance companies won't be subject to moral hazard.

What's wrong with this picture? Tune in next time, when we actually begin to discuss health insurance.

1 comment:

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