What causes people to be uninsurable?

[countach74]

Hello everyone,

 

This is my first post here, but I have been watching Stefan for the past 6 months or so--fascinating stuff!

 

Anyways, I've been learning about economics this year during my free time. I started first with Thomas Sowell's "Basic Economics" and now am most of the way through Murray Rothbard's "Man, Economy, and State." Both books have been quite enlightening (particularly the latter). My perspective of the world has indeed shifted.

 

That said, it is my understanding that in the free market, whenever a there is a desire that is inadequately met, entrepreneurs will move in to that market in search of greater profits, meeting that desire. So this brings me to my question, why is it that certain people are uninsurable? My initial thought was that perhaps there are some regulations in place that make insuring a certain risk bracket unprofitable. Upon further consideration though, it occurred to me that it may be that there indeed are not enough people who fall in the "uninsurable" category who would be willing to pay the increased premiums that would be required, thus insurance companies simply stopped offering such a service. The more I think about it, though, the more that last possibility seems... well, not very possible.

 

Does anyone have an explanation?Thanks! Oh, and this question of the uninsurable is really targeted for pre ACA--we all know that the ACA will solve all of this problems. (Dang I couldn't say it with a straight face.)

[LovePrevails]

http://www.freenation.org/a/f12l3.html

[countach74]

Thank you for the reply. While that link does provide insight into how the system worked and how it was destroyed, it still doesn't answer my question. Perhaps my question was too vague; I will rehash it: In the time-frame immediately before the ACA, what factors caused people to be uninsurable at any rate?

[LovePrevails]

I don't know I can only guess that the insurers thought that they would definitely end up paying more than they received 

maybe they already had a terminal inllness that would need constant treatment

[ThomasDoubts]

They became uninsurable because they got sick.  You buy insurance to pool your risk of being sick with the rest of society.  Once you're sick, it's often too late.  You don't get to soak your house in gasoline, start a bonfire in the backyard, and then get the insurance company on the line to agree on a policy as your house is burning.  You don't get to call geico at the scene of an accident to purchase car insurance to cover the damage.  You don't get to wait until you get sick to buy health insurance.  It's unprofitable.  You have (or at least you used to, prior to ACA) a choice whether you purchase insurance or not, but by not doing so, you assume the risk and responsibility for covering your own damages.

 

This is the pricipal of insurance.  Defined: a practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium.

 

If you don't pay the premium, don't expect compensation.  If you have a long term disability or illness, or a short term illness that's expensive to treat, you'd never possibly pay in premiums what you would get in compensation.  This is why you are uninsurable.  If you are healthy, you may pay more or less in premiums over your lifetime than you recieve in compensation, and the insurance company manages those risks in an equitable manner.  With certain illnesses, they know with certainty that you could never be a profitable customer. 

 

If you have MS and need $2,000 worth of treatment/medications every month for the rest of your life, you'd have to pay >$2,000 in premiums every month.  You are never uninsurable, per se.  The problem is that the premiums that would be required would skyrocket beyond your means.  If Bill Gates were uninsured and diagnosed with Lou Gehrig's disease, he could get a policy that satisfies both parties; for example, paying $2.5 million dollars a year in premiums.  It becomes impossible for the individual before it becomes profitable for the company. 

[countach74]

Thanks. This is actually what I've been coming, although probably not as quickly as I should have. Basically, it becomes a payment plan rather than an insurance plan at that point--a payment plan with additional overhead, specifically. I appreciate your response greatly.

[ThomasDoubts]

Thanks. This is actually what I've been coming, although probably not as quickly as I should have. Basically, it becomes a payment plan rather than an insurance plan at that point--a payment plan with additional overhead, specifically. I appreciate your response greatly.

 

 

Yeah pretty much; an insurance plan is like a payment plan, but you're prepaying.  I'll pay you x every month, if you cover the occasional large expenses.  When the company evaluates a customer they determine statistically what he is likely going to incur in costs to the company over his lifetime.  Then they determine the amount he should pay each month to roughly offset those costs.  It's about paying a little each month rather than paying nothing every month, and then being hit with a monster bill you can't afford.  Some people end up better off economically, some worse, but that's determined by chance.  On average, insurance companies are very good at figuring these things out.  You can never predict when an individual will die, but you can predict the average life expectancy very accurately. 

 

If you go to buy health insurance the day before you get sick, you risk profile is pretty close to every other healthy person of similar age/lifestyle.  If you go the day after you are diagnosed with an expensive, incurable, long term disabling illness, you know longer present the same risks to the insurance company.  This is a main reason ACA forcing people to be covered for preexisting conditions is a huge problem.  If you force an insurance company to say a healthy person and a sick person present the same risk profile, they can't make economic decisions.  The moral is, if you want someone to pay your huge bill when you get sick, you have to pay a little each month to offset that.  Of course, you don't have to buy insurance, but if/when you get the big bill, it's your job to pay it, just like it always was.  Buying insurance is saying, "I no longer want to be responsible for paying a large hospital bill all at once.  What amount can I pay you (insurance company) each month, so that you will be responsible?"  Market forces and competition drive down that amount you pay to very small margins.  They have to make a profit for providing that service, but relatively speaking, it's very small, and encourages very accurate measurements of risk, and opportunities for individuals to reduce payments by having generally healthier behavior. 

 

Glad I could be of some help.