Sunday, February 5, 2017

What Is Insurance?

2017-3 (2/6/17) 
 
 With the battle over repeal of Obamacare descending
upon us medical insurance promises to be in the news for what
is likely to seem like forever.  It is a safe bet that the discussion
will generate more heat than light.  A good start would be
having everyone, especially those in Washington, D.C., know
what insurance is.  A bit of knowledge about what insurance can
and can't do would also be good.

     I am reminded of an age old riddle.  If you call a tail a
leg, how many legs does a dog have?  The answer, of course, is
four.  Calling a tail a leg doesn't make it a leg.  Neither does
calling a harebrained scheme insurance make it insurance.

     Insurance isn't magic.  It doesn't mystically prevent
expenses and loses.  Neither does insurance magically create
wealth to reimburse those expenses and loses.  In fact insurance
adds to those expenses and losses.  Someone has to pay the cost
of providing the insurance.

     Insurance is only an arrangement where many individuals
agree to pay small amounts to compensate a few who suffer
large losses.  There are four requirements for an expense or loss
to be insurable.  First, there must a number of people who face
the same risk of expense or loss.  Second, there must be a very
low probability that more than a few of those people will
experience the loss.  Third, the members of the group must have
little ability to avoid or cause the loss.  Fourth, it must be
impossible to know in advance who will experience the losses.

     A simple example will illustrate the basic principles of
insurance.  Assume that 10,000 people own houses.  History
indicates that on average only three houses will be hit by
tornadoes each year.  The loses can be shared through insurance.

     If some of the houses are in Oklahoma and some in
Minnesota, not everyone faces the same risk.  To make insurance
work, at a minimum those in Oklahoma would have to pay
higher premiums.  Otherwise those in Minnesota would reject
the insurance and buy less expensive insurance that only covered
houses in Minnesota.

     A recent poll found that 80 percent of people want
Obamacare repealed.  Apparently its failures haven't gone
unnoticed.  Sadly those failures were obvious from the beginning
to anyone who looked for them and was willing to see them.

     Obamacare combines insurance with extortion.  A minor
but controversial feature of Obamacare illustrates this point.  The
law mandates the coverage of contraceptives.  Contraceptive
insurance is impossible.  It is no more workable than "insurance"
to fill your cars fuel tank when it's empty.

     If contraceptive coverage were offered as an option, only
those who wanted to use contraceptives would buy it.  Almost,
everyone who bought it would use it.  The "insurance" would
cost more than the direct purchase of contraceptives.  No
sensible person would buy the coverage.

     Government "solved" the problem with extortion.  If you
buy medical insurance you are forced to pay for someone else's
contraceptives.  Refuse to pay the extortion and you not allowed
to purchase medical insurance.

     This is only the tip of the extortion iceberg floating in
Obamacare.   There is more than enough left for another column.

     I accidentally discovered a replacement for Obamacare. 
My spell checker wants to replace it with "macabre."  I did not
make that up.

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Copyright 2017
Albert D. McCallum

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