What if insurance is working exactly as designed
A few months ago before COVID-19 went pandemic (it feels like so long ago), I was having a warm, light hearted conversation with a new friend. As we patiently waited in the airport security line, she asked me what I do in my free time. I paused to think for a few seconds before proceeding to pour out my unfiltered thoughts on how insurance is easily the most twisted attempt at risk management in the known universe. The look on her face implied she was not expecting this response.
But this is not my insurance rant; I think I deliver that one much better in person; contact me if you’d like to hear it. This is my attempt at putting to reason why I think there’s not just a problem with insurance but that insurance is the problem. A problem that most of us in a very literal sense cannot afford to ignore.
So if you have some free time, read on.
But isn’t it just business
Now before I come off as just another one of those “insurance is evil” people (I am actually one of them), let me say this: Most businesses exist to make money by earning more than they are spending — that’s profitability. The same applies to insurance businesses. The more people that sign up and pay for insurance, the more money exists in the insurer’s bank account. The goal is to ensure they are collecting more in monthly premiums than the claims they pay out. That’s the insurance business model.
However, because paying out claims reduces the amount of money in the bank, insurers are careful to ensure that every claim is legitimate. And they do this by subjecting customers to drawn out claim processes filled with tedious verification, actuary, loss controllers, underwriters, claims adjusters and unending terms, conditions and exclusions!!! Oh let’s not forget the exclusions 🤦🏾♂️
But I don’t believe that insurance companies can excuse the aforementioned effects by claiming (pun not intended) that they are only doing business.
At the end of the day, I’m paying a lot of money to a big company for a future situation that may or may not happen. Chances are that I won’t even need to claim, and then I may as well have taken all my payments and set a bonfire in my backyard. And even when I do claim, the one entity which stands to benefit from my claim being denied is the one that must approve it. I cannot win.
Conflicting Interests
There’s a conflict of interest inherent to the insurance business model and conflicts of interest erode trust. And if I can’t trust my insurance provider, then who can I trust!!! Apologies for the sarcasm 😄, that’s just my way of dealing with pain.
“Okay, slow down Aaron, you’ve got to have insurance, because of the ‘what-if’ factor. What if someday you need that payout? What if your car gets stolen? What if you get sick and you can’t afford to pay the medical bills?” Well all those are fair questions but here’s one more that crosses my mind most often; What if my insurance company doesn’t pay my claim?
Insurance is often sold as a “peace of mind” but most of us are still worried that we won’t be covered when we need it the most. It all comes back to the conflict of interest. My interest is in having financial cover when I need it. An insurer’s interest is in maximizing profits. I have to believe that they will pay so I put my trust in someone who doesn’t know me. Someone who decides behind closed doors whether or not to give me money. And they’re doing all this with the knowledge that if they don’t pay, they make more money. I cannot win.
How did we get here?
Wikipedia has the recorded history of how risk mitigation by insurance begun and got here. Here’s my fictional (and more romanticized) version.
Two neighbors, myself and Jorge, were at the risk of having our homes hit by lightening because well, that’s just how the weather rolls in our neighborhood. Being fully aware of this risk, we each considered if we should save up some money that would help keep a roof over our heads in the event that lightening struck. We quickly realized that it’s highly unlikely that lightening could strike both our homes at the same time so we would both be better off if we put our savings together and used the collective amount to bail one of us out in the tragic event of loosing our home to lightening.
We eventually let other neighbors in on the group savings but the savings soon became a headache to manage so we decide to hire a company to help us manage the savings. We find a company willing to offer this service but they do not charge a flat fee. They will collect the savings, pay out money to neighbors who get hit by lightening and then keep the rest of the money (if any) to themselves as payment for managing the neighborhood savings. This company does not share in the risk me and Jorge had, they just manage the savings. And that’s how (in my mind) the first insurance company was born. Since then, that company inspired many other companies claiming to manage all sorts of risks while actually wreaking havoc on all of mankind to this day.
Can we fix insurance?
Some people have asked me if I think the insurance model is broken and therefore asking if it is repairable. If I were born yesterday, it would seem reasonable that maybe something has gone horribly wrong with insurance. But I wasn’t born yesterday (I have always wanted to say that). I have lived in 4 countries, in 4 different continents and my experience with all forms of insurance in those places has left me feeling a lot more pessimistic about the diagnosis here. I, in fact, think insurance is working exactly as designed and that those who believe it is only a business model gone wrong are mistaken about its intended purpose.
It would be as though you paid for a service every month that you never used and on that one time when you need to use the service you have been paying for, the service provider either denies you the service or they let you use it (yes, the service you have been paying for) but they then punish you for using it by increasing the monthly fee you will be paying going forward... something feels really wrong about that sort of relationship you have with that service provider.
Conclusion
For all those reasons (and probably more), I have ranted very regularly and increasingly more passionately about the problem of insurance to most of my family and friends since the day I learned of it. I don’t pay for insurance unless I am legally required to. (yeah; they even got the law to enforce this madness). I have (mostly passively) been thinking on this problem for the past 4 to 5 years. This year, I decided to do something about it and have started exploring other alternatives to risk management. I will be sharing more about the journey so far here. Look out for those posts.
Special thanks to friends; C.P. and Nimrod Wandera for reviewing this one.
If you enjoyed reading this, please share it. I appreciate the feedback and encouragement.
