Search Box

Thursday, February 4, 2010

How insurance rates are figured

When figuring out your rate, car insurance companies take into account how old you are, how much you drive, whether you smoke, and whether you've been in any accidents recently. (If you're a teenager, you get credit for maintaining a GPA of 3.0 or above; teenagers who are responsible enough to maintain high GPA's generally don't drive drunk.) In short, they want to know how much of a risk you are. All this seems quite reasonable.

When you have your house insured, the companies first take a look at the house and figure out its replacement cost. They then determine how flammable it is and whether you live in a flood plain. Then they check to see whether you have firewalls installed, if the smoke detectors are working, and if you have extinguishers handy. This seems reasonable too.

Yet when you buy health insurance, the only things they check are whether you smoke and if you have a pre-existing condition. One would think that people who exercise, who have low blood pressure, who don't drink or take drugs, and who have a body mass index within the recommended guidelines, would get a more advantageous rate than people who don't. But that's not how it works.

I know, this is self-serving for an exercise addict like myself. And I realize everybody would just lie about their exercise regimen. Nonetheless, it seems unfair that people who take care of themselves must subsidize those who do not.

I guess that's a metaphor for all sorts of political issues.


Anonymous said...

I've never thought of US health insurance as comparable to conventional auto or home "insurance". The element representing protection against "catastrophic" loss is similar, but not the large part of the market dealing with "routine" healthcare. The latter is bound to work differently: for example, as healthcare becomes a "free" good on the margin, people generally consume more of it. In contrast, not many of us want more auto accidents or cancer treatments, even if the marginal financial cost is zero.

In addition, in my view the market is hugely inefficient, because of regulation (particularly at the state level), because of concentration, because of lack of transparency (complexity makes it easier for the players to obscure economics), and because most have employer purchased health care.

If there were more competition and personal responsibility for costs, and fewer regulatory barriers, my expectation is that you would be able to lower cost insurance based on your "claims history" as well as your health metrics because you would be a member of a good customer segment for a competitive company to serve. You might even find policies where you would be eligible for "no claims" or "low claims" bonuses.

But the whole system today is based on forced cross-subsidy (more so if Obamacare is enacted), so good luck!

John Craig said...

Guy -- You are absolutely right in your analysis. People with "free" insurance from their employers tend to be the worst abusers of it in terms of getting excess, unneeded medical care which the rest of us have to pay for. And there certainly needs to be more competition across state lines. And the entire system is rigged so that there's not much choice and we don't really see what we're paying for. Finally, I agree that getting rid of these problems will prove near impossible. (And Obamacare is certainly not the answer.)