February 25, 2010

On Insurance

So I hate the whole debate about health insurance for about a billion reasons. But first, I want to explain the concept of insurance so that I can stop yelling at the radio.

Conceptually, insurance is basically splitting up a risk cost into small, regular payments over a period of time. So let's say your house would cost you $120,000 to replace if it burned down and there's a 100% likelihood that it will burn down once every 10 years. Your insurance company would be justified in charging you $1000 a month in insurance, plus some sort of fee for saving you from the inconvenience of paying out $120,000 every 10 years. Also, it's hard to budget for $120,000 sometime in the next 10 years, whereas it's very easy to budget for $1000 a month.

Now, let's take it one step further and say that there's a 100% risk that one and only one $120,000 house on your block will burn down in the next 10 years and you have 9 neighbors plus yourself, all with an equal likelihood of losing a house (and nobody can move away.) Then, each of you only has to pay $100 a month plus fees because the insurance company has amortized its risk across multiple houses.

Obviously, health insurance is a good deal more complicated than this in terms of the actual numbers... but let's take mobile homes because they're a lot like individual health. Let's say instead of 10 houses, there were 10 mobile homes, each in various degrees of age and disrepair. Now, let's say that I have the newest $120,000 mobile home and it is a sweet mobile home (for $120,000 it had better be) with a state-of-the-art sprinkler system and 2 nasty dogs to run off would-be burglars. Because of that and because I own my home free and clear, I opt not to have home-owner's insurance. So, now 9 owners have to split the $120,000 ... and that makes an ugly number that is more that $100 a month.

But it gets worse... because Bob has a 25-year-old mobile home with exposed aluminum wiring and a gasoline-soaked cloth roof. His house is pretty likely to burn, so he pays $1000 a month. In fact, Bob's house is so crappy that when it burns, the insurance company refuses to pay on account that Bob claimed he had a no-gasoline-soaked-roof house on the application form when he signed up for his insurance. So he gets nothing and is still out all of his premiums or, if he's lucky, they send his premiums back.

So, Bob buys another house, and this time he complains to his Congressman that it's not fair that he pays a higher premium just because he owns a crappy house and the Congressman is up for re-election in a "mostly gas-soaked rag house" district, so he agrees. He passes legislation that makes everyone pay equally for insurance, regardless of if his or her house has a roof made of gas-soaked rags. So now all of Bob's neighbors hate Bob because the insurance company isn't going to just eat the cost of replacing Bob's house and now everyone pays $900 a month. Yeah, the cost for Bob and his ilk went down $100 a month... but all of the people in good mobile homes (and even good houses) now pay a lot more.

So now everyone on my block starts looking at my sweet mobile home and realizing that I pay $0 a month and am saving all of that money to move out of my mobile home and into a nice house. And they're thinking, "If we could get him to pay insurance, all of us would pay a WHOLE LOT LESS." And they're right... but I don't want to pay for insurance. Unfortunately, they have the Congressman on their side and the Insurance Company promises to charge them all $400 less a month if they can get every owner of a sweet mobile home like mine (or an actual house) to pay in.

But here's where it gets interesting for the benefits of buying insurance. Because Flammable House Insurance Company has a policy with every house in the state, it's in their best interest to get the cheapest rates on gasoline-soaked rag roof trailer homes. So instead of a replacement cost of $120,000 , they can get me that trailer at $80,000 brand new. So in that sense, it makes more sense for me to go to FHIC, assuming I'm forced to buy insurance.

And the best part of all of this is that I'm just scratching the surface of the notion of insurance... there's still the jerks who manage to make it so I can only buy their brand of windows for my gasoline-soaked rag roof trailer home and the people that sue the builders of gasoline-soaked rag roof trailer homes and drive the cost of a new trailer home by an unknowable amount. Oh, and then there are the builders themselves who are required to build a house for anyone, even if they can't afford it and then get the money back from the government. The list goes on.

And the problem is that the system is complicated. And everyone on all sides is convinced of his or her correctness. The one side doesn't like seeing people living on the streets and the other side is convinced that the government can't afford all of these houses and screw the people living on the street. Me? I just want people to have an honest and straightforward conversation. But these are politicians and talking heads and NONE of them wants that.

Posted by Vengeful Cynic at February 25, 2010 07:13 PM | TrackBack