Saturday, 23 February 2008

Serves them Right (Insurance should not be a Business)

Here's a great business model: Start a health insurance company. Promise to insure people against all kinds of diseases and keep collecting their premiums every month. Go public, so now you have shareholder expectations to meet. When a policyholder does develop a disease and makes a claim, simply cancel their policy to avoid paying out any money. Your profits stay high, you meet Street expectations and you can pay yourself handsome bonuses for running a successful business.

Health Net tried just that, but a judge wasn't amused. The insurer had to pay $9 million dollars in punitive damages to the policyholder whose policy they had cancelled at the very time she needed the money to pay for her cancer treatment. $9 million dollars! Scratch that business model. It doesn't seem to work, does it?

I have believed for some time now that insurance is very different from other businesses. Insurance is about spreading risk. That's why I'm also against extensive checks before policies are handed out. Why? Just take it to its logical conclusion. Take breast cancer, for example. There are fairly foolproof genetic tests these days that can tell if a person is predisposed to breast cancer or not. If insurance companies begin to use the test and only offer policies to women who report negative on the test, then the very purpose of insurance is defeated. The women who are accepted as policyholders are just wasting their money, because they aren't likely to develop cancer anyway. The women who are in danger of developing cancer at a later stage will have no means of paying for their treatment because they can't get an insurer to cover them. Better to stick to the current model where everyone pays a premium amount small enough not to break their budget, so that the unfortunate few who do develop the disease have the money to pay for their (expensive) treatment.

Certainty defeats the purpose of insurance.

While we strive for certainty in most things, insurance should not be one of them. It is uncertainty that makes insurance work, and we must keep that alive. Yes, it's a form of socialism when we take from everyone to support a few needy individuals, but then, so are taxes.

Insurance works. So does capitalism. The combination doesn't. I believe insurance companies should be not-for-profit mutual societies, not listed corporations.

Post a Comment