Monday, January 17, 2011

Purpose of insurance

California news:
Starting this month, a new state law prohibits health insurers in California from using gender as a factor in pricing individual policies. ...

"The basic idea of insurance is that the risk is supposed to be spread across the entire pool," she said. "Once you start identifying certain populations and saying they have to pay more for various reasons, then that defeats the purpose of insurance."
No, the purpose of insurance is to hedge against uncertain losses. It is not to make life cheaper for hypochondriacs.

Insurance is more efficient when companies are able to make use of the available information. Women don't really get sick any more than men, but they do seek medical services more often. This is especially true in mental health services. Insurance works well because the companies are able to discriminate, and then spread the risk among similarly situated customers. We pay a price for these non-discrimination laws.

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