Our understanding of Insurance…….Part I

It is interesting to watch the healthcare debate on TV as I study insurance theory. It seems we have fallen in love with the concept of insurance, and it is invading larger and larger parts of our lives. But is this a good thing?

Let’s start with what makes a risk that should be insured. Well….it would:

  •  Be unpredictable in timing,
  •  Infrequent,
  •  Large in negative outcome,

These are the characteristics of risks that are well served by insurance.

In this lens, let’s take a look at Dental Insurance…….I go every 6 months. Unpredictable? No. Infrequent? No – I go twice a year. Big in negative outcome? Maybe. This is the only grey area where I can see one can make the case for needing dental insurance. Normally the cost is relatively low. I have only had one root canal in 55+ years. Only time it really cost me. So overall, I have to give it a low insurability grade.

Another one worth looking at…….Eye/Vision Insurance. Unpredictable? No – I go for an appointment every year. Infrequent?  No – every year.  High Negative cost?  No – these are glasses that you can get at LensCrafters. This is a product/service that clearly fails Insurance 101. (I had someone tell me that as vision plans have become more popular, the price of glasses has doubled. Go figure.)

What these “insurance benefits” all share is the insurance company’s ability to separate paying for a service from receiving the benefits of that service. This is why costs sky-rocket. Once you have “paid” for your insurance, you become cost insensitive. Someone else is paying – gimme the best. Is this a good thing?   Maybe we are all going to pay the price in the long-run?…..