a primer on insurance

We are told insurance works to protect people against unforeseeable and unexpected tragedy. The concept is fairly simple: a number of people facing risk pool money together so it can be paid in times of need out to the few who become actual victims. There is no cheating, everyone knows they may not become a beneficiary unless something bad happens, and most would choose not to ever "have to benefit" from this arrangement.

Occasionally, a participant will try to cheat and issue a false claim. That is a bad idea, and the industry has the full backing of the government and law enforcement to make sure these bad apples are punished in a highly publicized and visible fashion. This type of cheating does not pay. Besides there is a far easier way to reap benefits. One where the government will give you a helping hand.

First, add a little capitalist twist to the story and you get the insurance company. In return for orchestrating all the logistics the company is allowed to make a profit. That is easy since the company can invest the money people provide and get a return hopefully before it will have to pay the few unlucky souls. Nobody objects to the company charging a bit extra either. People don't even object to companies rejecting those who are considered high risk. Or charging more to those who are high risk but nevertheless "acceptable." After all, companies have to make money.

In short, this arrangement seems rather straightforward and easy.

Experience has taught us to beware of such easy and straightforward schemes. There is ample room to cheat here. People pay upfront and if you can somehow avoid paying them back later, you can pocket all the money. The easy way to do that is to refuse coverage to those who need it, when they need it. You can start by refusing claims, or making it hard for people to file claims. That will turn a lot of them away, while others may die before they can benefit. 

It is now so common for health insurers to deny claims that patients expect to have to argue with their carrier at one point or another. Today's WSJ had some tips on how to argue with your insurer in case a claim is denied. But it doesn't stop there. Insurance companies also try to ditch you when you file claims for more than a few pennies. They will go to great lengths to uncover technicalities in your record that will allow them to break the contract.

It is one of those tactics insurance companies find acceptable or evidence of good business practices. You know, protecting shareholders? How else would you explain their stance on California's bill AB1945?

The bill prevents insurance companies from retroactively rescinding coverage. Mind you, it still permits insurance companies to drop customers who intentionally submitted fraudulent applications. But that requires proof and meaning extra work and smaller profit margins. Better to avoid it when we can.

AB1945 is a straightforward honest bill. Yet the insurance companies are fighting it tooth and nail. A spokesperson for the industry said -with a straight face- that they are trying to protect consumers. Not the shareholders, folks, you. You, the insured. They are trying to protect you from those fraudulent cheaters that are causing all our problems.

It turns out insurance companies like to rescind policies retro-actively. They like to dump patients with expensive medical conditions that were diagnosed years after they were approved for coverage. Recently, Blue Cross was fined for dumping 1,770 members, while Blue Shield dumped 450. Kaiser Permanente, Health Net, and PacifiCare were also fined for dumping patients. Dumping it seems is part of the way insurers do business.

Governor Schwarzenegger personally knew someone who was diagnosed with cancer and had his coverage rescinded. According to the insurance company, the patient had a pre-existing condition and should not have had coverage. What was that pre-existing condition, you ask? A knee injury sustained years earlier. The governator was so shaken by this incident, he decided to do something about it. Only so far it hasn't happened. And if the insurance industry gets their way, it won't happen. Because all the money they save goes into their shareholder's pockets. That my friends is their true mission: to collect people's money and stuff it into shareholder's pockets.

In case you doubt if insurance is profitable, look no further than Warren Buffett. And if you wonder what happens when insurance companies do dumb stuff and end up losing money, look no further than AIG. As you can see, the insurance business is a very good business with very little downside risk.