| Many Americans rely on their automobiles to get to | | | | insurance at the intuitive level. For sure, as |
| work. No automobile means no job, no rent or | | | | indispensable automobiles are to our lifestyles, there is |
| mortgage money, no food. A single parent, struggling to | | | | no loud national movement, accompanied by moral |
| make ends meet in the suburbs with 100,000 miles on | | | | outrage, to change these principles. |
| the odometer, would presumably welcome the | | | | Unsustainable Market |
| guaranteed opportunity for low-priced insurance that | | | | In contrast, similar principles are routinely violated in |
| would take care of every possible repair on her auto | | | | health insurance. To demonstrate this, let's return to the |
| until the day that it reaches 200,000 miles or falls apart, | | | | same suburban mother from the opening paragraph. |
| whichever comes first. Especially if the insurance is | | | | She's busy working, driving to and from work, and |
| valid regardless of whether she even changes the oil | | | | driving her kids to school and activities. She ends each |
| in the interim. | | | | day exhausted, sitting on the couch with fast food. |
| So why aren't the auto insurance companies writing | | | | She's obese, has a sedentary life, a bad diet, and |
| such coverage, either directly or through used auto | | | | hasn't taken the time to go to the doctor in years. |
| dealers? And given the importance of reliable | | | | After a simple injury doesn't heal for weeks, she turns |
| transportation, why isn't the public demanding such | | | | up at the emergency room and learns she has type II |
| coverage? The answer is that both auto insurers and | | | | diabetes. Although type II diabetes is controllable, |
| the public know that such insurance can't be written | | | | changing diet and exercise habits and properly tracking |
| for a premium the insured can afford, while still allowing | | | | her condition takes time and effort and she's never |
| the insurers to stay solvent and make a profit. As a | | | | quite successful in implementing the necessary lifestyle |
| society, we intuitively understand that the costs | | | | changes. |
| associated with taking care of every mechanical need | | | | So the initial emergency room visit is only the first of a |
| of an old automobile, particularly in the absence of | | | | long list of health care related to non-controlled |
| regular maintenance, aren't insurable. Yet we don't | | | | diabetes and other problems associated with obesity. |
| seem to have these same intuitions with respect to | | | | Whether she has individual or group insurance, her |
| health insurance. | | | | insurance pays for each episode of care, without |
| If we pull the emotions out of health insurance, which is | | | | singling her out for a premium increase, and without |
| admittedly hard to do even for this author, and look at | | | | charging her any more cost sharing than is charged to |
| health insurance from the economic perspective, there | | | | the healthiest and most medically diligent insureds. Her |
| are several insights from auto insurance that can | | | | coverage continues until she voluntarily changes |
| illuminate the design, risk selection, and rating of health | | | | insurance companies and/or employers or becomes |
| insurance. | | | | eligible for Medicare. If she's covered under group |
| Auto insurance comes in two forms: the traditional | | | | insurance she may not even pay any premium. Her |
| insurance you buy from your agent or direct from an | | | | insurance continues unabated, even though the |
| insurance company, and warranties that are | | | | disease was caused by neglecting her body and she |
| purchased from auto manufacturers and dealers. Both | | | | maintains her poor lifestyle even after the disease |
| are risk transfer and sharing devices and I'll generically | | | | becomes known. |
| refer to both as insurance. Because auto third-party | | | | This just wouldn't happen in auto insurance. This |
| liability insurance has no equivalent in health insurance, | | | | scenario is the auto insurance equivalent of |
| for traditional auto insurance, I'll examine only collision | | | | guaranteed access to low-priced auto insurance that |
| and comprehensive insurance - insurance covering the | | | | takes care of every possible repair, including damage |
| vehicle - and not third-party liability insurance. | | | | already done, until the day the car falls apart so |
| Bumper to Bumper | | | | completely it's unsalvageable (death) or reaches |
| The following are some commonly accepted principles | | | | 200,000 miles (Medicare), regardless of whether she |
| from auto insurance: | | | | even changes the oil (takes care of herself) in the |
| * Bad maintenance voids certain insurance. If an | | | | interim. |
| automobile owner never changes the oil, the auto's | | | | As a society, we don't expect this in private-market |
| power train warranty is void. In fact, not only does the | | | | auto insurance, but we expect it in private-market |
| oil need to be changed, the change needs to be | | | | health insurance. Furthermore, there's a chorus of |
| performed by a certified mechanic and documented. | | | | national and state interests, which continuously pushes |
| Collision insurance doesn't cover cars purposefully | | | | us further away from the auto insurance principles. |
| driven over a cliff. | | | | The current private health insurance market isn't |
| * The best insurance is offered for new models. | | | | sustainable. Prices have been consistently increasing |
| Bumper-to-bumper warranties are offered only on | | | | faster than inflation for decades. Each year, insureds |
| new cars. As they roll off the assembly line, | | | | use more health care than ever before and more |
| automobiles have a low and relatively consistent risk | | | | people have no insurance at all. Most actuaries and |
| profile, satisfying the actuarial test for insurance pricing. | | | | other people in the private health insurance market |
| Furthermore, auto manufacturers usually wrap at least | | | | don't want national health insurance with its |
| some coverage into the price of the new auto in order | | | | bureaucracy and one-size-fits-all benefits. Yet, we're |
| to encourage an ongoing relationship with the owner. | | | | trying to sustain a private insurance system, which |
| * Limited insurance is offered for old model autos. | | | | violates the very principles we know are necessary |
| Increasingly limited insurance is offered for old model | | | | for private insurance markets. |
| autos. The bumper-to-bumper warranty expires, the | | | | Yes, health insurance involves the sacredness of |
| power train warranty eventually expires, and the | | | | human life and is therefore different from auto |
| amount of collision and comprehensive insurance | | | | insurance. But if we're to sustain a private-market |
| steadily decreases based on the market value of the | | | | solution to health insurance, actuaries need to explain |
| auto. | | | | to the larger society, in terms that society understands, |
| * Certain older autos qualify for additional insurance. | | | | the rationale for the following principles: |
| Certain older autos can qualify for additional coverage, | | | | * As sacred as health care is, it's still an economic |
| either in terms of warranties for used autos or | | | | transaction that has to be balanced by individuals and |
| increased collision and comprehensive insurance for | | | | societies, against other economic choices. It can't be |
| vintage autos. But such insurance is offered only after | | | | unlimited. Sometimes it will be secondary to other |
| a careful inspection of the automobile itself. | | | | choices. On a given day, for example, the mother in |
| * No insurance is offered for normal wear and tear. | | | | our scenario may value her car more than her health. |
| Wiper blades need replacement, brake pads wear out, | | | | * Insurance premiums should be paid by the individual |
| and bumpers get dings. These aren't insurable events. | | | | and tied to controllable risk factors. This will provide the |
| To the extent that a new car dealer will sometimes | | | | best incentive for the control of risk factors. |
| cover some of these costs, we intuitively understand | | | | * Although it's hard to draw the line between abuse, |
| that we're 'paying for it' in the cost of the automobile | | | | neglect and ignorance, self-abuse shouldn't be insured |
| and that it's 'not really' insurance. | | | | and we need to draw that line somewhere. |
| * Accidents are the only insurable event for the oldest | | | | * The private market can't provide unlimited, |
| automobiles. Accidents are generally insurable events | | | | self-directed health insurance. |
| even for the oldest autos; with few exceptions service | | | | * Routine care and ongoing treatments of chronic |
| work isn't. | | | | conditions can be pre-funded, can even be subsidized, |
| * Insurance doesn't restore all vehicles to pre-accident | | | | but they don't constitute 'insurable events.' |
| condition. Auto insurance is limited. If the damage to the | | | | * Insurance can't be expected to keep every human |
| auto at any age exceeds the value of the auto, the | | | | body in pristine condition. No amount of health care will |
| insurer then pays only the value of the auto. With the | | | | prevent everyone's ultimate death. |
| exception of vintage autos, the value assigned to the | | | | * Comprehensive, unlimited, non-subsidized |
| auto goes down over time. So whereas accidents are | | | | private-market coverage isn't possible for people with |
| insurable at any vehicle age, the amount of the | | | | severely impaired health. |
| accident insurance is increasingly limited. | | | | * The private health market can provide limited |
| * Insurance is priced to the risk. Insurance is priced | | | | non-subsidized health insurance, such as protection |
| based on the risk profile of both the automobile and | | | | from accidents, to even health-impaired individuals. |
| the driver. The auto insurer carefully examines both | | | | * Individuals who can afford to do so and who take |
| when setting rates. | | | | good care of themselves should be able to 'buy up' to |
| * We pay for our own insurance. And with few | | | | better coverage. People have the option of buying up |
| exceptions, automobile insurance isn't tax deductible. | | | | for everything else in life. |
| As a result, the fear of increasing insurance rates due | | | | Discussion of these principles is lacking from most of |
| to traffic violations and/or accidents changes our | | | | the current health insurance debate. If society can |
| driving behavior and we sometimes select our | | | | intuitively understand how similar principles apply to |
| automobiles based on their insurability. | | | | health insurance, then they should be able understand |
| Each of the above principles is supported by solid | | | | the principles in the health insurance context. We need |
| actuarial theory. Although most Americans can't | | | | to initiate the debate. |
| describe the underlying actuarial theories, most | | | | This commentary is solely the opinion of its author. |
| everyone understands the above principles of auto | | | | |