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BigBen · 02-16-2006, 07:19 AM

What is insurance?

Insurance is a way of paying someone a small amount consistently to avoid a very large amount in an unlikely event.

Car insurance? $60 a month, but I don't have to pay $20,000 when someone smashes my car.

House insurance? $40 a month, but I don't have to pay $200,000 when my house catches fire, or a tornado rips it apart.

Health insurance? $X a month, but I don't have to pay $X when my health goes.

Hold on.

Notice that I can put a price on the value of the car, the house, and everything else that is normally insured. Hell, you can buy mail insurance.

And these things that I have insured, they are for UNLIKELY events, not routine maintenance. If your car breaks down because you didn't change the oil, your insurance doesn't cover it. Insurance won't cover the replacement of your roof in 25 years when it starts to leak.

Let us put health insurance into the normal insurance category;

1. What is your life worth? I argue that it is infinitely priceless. You are willing to spend any amount of money you have to stay alive. All things staying the same (Ceteris Paribus), money is worthless if you are not here to spend it. Lets keep your kids and your legacy out of this for brevity sake.
How do I put a value on you feeling good? If you are in pain, how much money would you be willing to spend to have the pain go away? I would argue that it is a lot of money, but not EVERYTHING YOU OWN. Thus, we are now in an argument of relativity.

2. What are the chances that you will die? I argue that it is 100%. Did you know that if every person lived long enough, everyone would get cataracts? Those who don't just died before their cataracts came. Using this logic, it is a certainty that we will need healthcare, and it is no longer an unlikely event, as in fire and accident insurance.

With normal insurance, I can take the EXPECTED VALUE of the cost of repair or replacement of the insured item, and then multiply that by the LIKELIHOOD of a bad event occuring. I factor in inflation rates, types of vehicles and types of homes, and using statistical models I can come very close to predicting what my costs are going to be in the future; Statistics being what it is, I can only do this when large number of people are involved. Thus, if I want to take my risk away, I need large numbers of insured people. I won't go into the mathmatics here, you can research the statistical principles of insurance elsewhere.

But health... it is different. It is a state of being. Your body is the only one you have. Look at yourself in the mirror. Count the scars. What is your health worth?

What about that scary story you read about here (and elsewhere) about that healthy guy that got cancer, or that funky rare disease? The media is always sure to tell the public the costs of treatment in the private sector. Why? People want to avoid that, and they are interested in reading about someone else's misfortune. "Boy, am I glad that wasn't me!". Think of it like mental rubber-necking at a car accident.

How do you insure against that? The costs of my cancer treatment may very well be different than yours. You may live through your bout of prostate cancer, and I may die. I can't go back to the dealership and ask for a new prostate. I can't phone the real estate agent and ask to move to a different body. I can't (as a Canadian) comparison shop for my cancer surgery. How in the hell would I? I am not the expert...

So what do you do with private health insurance? You cover people for a list of very uncommon, yet very expensive medical procedures. You put people into groups (smoker/non-smoker, male/female, over 35 yrs old/under 60 yrs old) and you run a very complex algorithm to see what their monthly payments should be. Then you need large numbers of people in each category to round out the statistical model, and you make money as an insurance agency.

If you want more common procedures covered, then the expected value of your insurance will go up, because the odds are changing.

But what if you got a rebate on your insurance for putting in sprinklers in your home to prevent fires, and you went to a defensive driving course to be a better driver? You are changing the odds of very bad things happening, and you should be compensated for that... Is health the same way?

Should your insurer pay you to eat healthy, work out, get a good nights sleep, quit smoking, and have regular health check-ups? Some people say yes. Others argue that free will is more valuable than that.

Still reading? I would like to take this opportunity to thank you. I will finish by saying that comparing normal insurance with health insurance is a straw-man argument. They are not the same, and are so fundamentally different at the basic statistical level that comparing them only confuses matters.

Your final question is an Economic one, and one that frankly fascinates me; Why would you choose to spend your money on X instead of Y? You obviously see the benefit in health insurance, and cannot understand why someone would spend their money instead on cigarettes and alcohol, spinning rims and subwoofers... That is why people started studying human economic behaviour hundreds of years ago.

All I can tell you is that people get more personal good (utility) with their consumption set than they would by replacing some of their purchases with insurance. People are risk-adverse, that is true. They also try not to think about getting sick, old or dying.

02-16-2006, 07:19 AM	#7 (permalink)
BigBen Comedian Location: Use the search button	What is insurance? Insurance is a way of paying someone a small amount consistently to avoid a very large amount in an unlikely event. Car insurance? $60 a month, but I don't have to pay $20,000 when someone smashes my car. House insurance? $40 a month, but I don't have to pay $200,000 when my house catches fire, or a tornado rips it apart. Health insurance? $X a month, but I don't have to pay $X when my health goes. Hold on. Notice that I can put a price on the value of the car, the house, and everything else that is normally insured. Hell, you can buy mail insurance. And these things that I have insured, they are for UNLIKELY events, not routine maintenance. If your car breaks down because you didn't change the oil, your insurance doesn't cover it. Insurance won't cover the replacement of your roof in 25 years when it starts to leak. Let us put health insurance into the normal insurance category; 1. What is your life worth? I argue that it is infinitely priceless. You are willing to spend any amount of money you have to stay alive. All things staying the same (Ceteris Paribus), money is worthless if you are not here to spend it. Lets keep your kids and your legacy out of this for brevity sake. How do I put a value on you feeling good? If you are in pain, how much money would you be willing to spend to have the pain go away? I would argue that it is a lot of money, but not EVERYTHING YOU OWN. Thus, we are now in an argument of relativity. 2. What are the chances that you will die? I argue that it is 100%. Did you know that if every person lived long enough, everyone would get cataracts? Those who don't just died before their cataracts came. Using this logic, it is a certainty that we will need healthcare, and it is no longer an unlikely event, as in fire and accident insurance. With normal insurance, I can take the EXPECTED VALUE of the cost of repair or replacement of the insured item, and then multiply that by the LIKELIHOOD of a bad event occuring. I factor in inflation rates, types of vehicles and types of homes, and using statistical models I can come very close to predicting what my costs are going to be in the future; Statistics being what it is, I can only do this when large number of people are involved. Thus, if I want to take my risk away, I need large numbers of insured people. I won't go into the mathmatics here, you can research the statistical principles of insurance elsewhere. But health... it is different. It is a state of being. Your body is the only one you have. Look at yourself in the mirror. Count the scars. What is your health worth? What about that scary story you read about here (and elsewhere) about that healthy guy that got cancer, or that funky rare disease? The media is always sure to tell the public the costs of treatment in the private sector. Why? People want to avoid that, and they are interested in reading about someone else's misfortune. "Boy, am I glad that wasn't me!". Think of it like mental rubber-necking at a car accident. How do you insure against that? The costs of my cancer treatment may very well be different than yours. You may live through your bout of prostate cancer, and I may die. I can't go back to the dealership and ask for a new prostate. I can't phone the real estate agent and ask to move to a different body. I can't (as a Canadian) comparison shop for my cancer surgery. How in the hell would I? I am not the expert... So what do you do with private health insurance? You cover people for a list of very uncommon, yet very expensive medical procedures. You put people into groups (smoker/non-smoker, male/female, over 35 yrs old/under 60 yrs old) and you run a very complex algorithm to see what their monthly payments should be. Then you need large numbers of people in each category to round out the statistical model, and you make money as an insurance agency. If you want more common procedures covered, then the expected value of your insurance will go up, because the odds are changing. But what if you got a rebate on your insurance for putting in sprinklers in your home to prevent fires, and you went to a defensive driving course to be a better driver? You are changing the odds of very bad things happening, and you should be compensated for that... Is health the same way? Should your insurer pay you to eat healthy, work out, get a good nights sleep, quit smoking, and have regular health check-ups? Some people say yes. Others argue that free will is more valuable than that. Still reading? I would like to take this opportunity to thank you. I will finish by saying that comparing normal insurance with health insurance is a straw-man argument. They are not the same, and are so fundamentally different at the basic statistical level that comparing them only confuses matters. Your final question is an Economic one, and one that frankly fascinates me; Why would you choose to spend your money on X instead of Y? You obviously see the benefit in health insurance, and cannot understand why someone would spend their money instead on cigarettes and alcohol, spinning rims and subwoofers... That is why people started studying human economic behaviour hundreds of years ago. All I can tell you is that people get more personal good (utility) with their consumption set than they would by replacing some of their purchases with insurance. People are risk-adverse, that is true. They also try not to think about getting sick, old or dying. __________________ 3.141592654 Hey, if you are impressed with my memorizing pi to 10 digits, you should see the size of my penis.