Saturday, December 08, 2007

Insurance is a Product

One argument that I am starting to hear more frequently is beginning to irk me. Well, I suppose it's less of an argument than a point of view, really. The point of view that insurance is a social service, and therefore needs to be provided to everyone equally, is sadly mistaken. This most often crops up in conversations about health insurance and the inability of some people to get health insurance, but I also have heard this conversation in the realm of flood insurance as well.

Insurance companies are a business. They are not a charity or a social service organization. This means that they have an obligation to their owners to make profit, not to society in general to provide blanket coverage. Ideally, the premiums you pay would exactly (with interest built in) cover any payouts that you get from a policy, plus expenses and a set level of profit for the company. This principle is called the Equivalence Principle, and it is how young actuaries learn to set premiums. I don't actually set premiums in my work, so I can't tell you if this is used in practice (comments are welcome), but that's how it's taught, anyway.

That being said, someone with a higher probability of having a policy payout will have a higher premium. It's easier, and cheaper, to get health insurance for a 20-year-old than a 50-year-old because the 20-year-old has less risk of health problems. The opposite is true with automobile insurance, however.

Anyway, insurance is not a social service. It is a product, not a right.

As always, comments are welcome.

No comments: