Saturday, May 1, 2010

Health insurance vrs life insurance

The issue arose in comments as to whether the fact that the individual health insurance market doesn't work very well is a sign of economic inefficiently. Not by itself. Something is considered economically inefficiently only if there is a better way of doing it. While there are probably numerous ways the individual health insurance market could be made to function better, many of its problems are fundamental. Health care and insurance are just not a very good fit.

In my view the ideal insurable risk has the following features. There is a small risk of a large economic loss. The loss while large is strictly bounded. Most losses are total. It is clear cut whether the loss has occurred. Losses are easily computed and paid off in money terms. Losses are difficult to fake or arrange. Losses for different people occur independently. The true risk can be easily and accurately determined. The true risk is largely independent of whether the individual is insured. The insured individual does not have a significant advantage (compared to an insurance company) in determining the true risk. The true risk itself behaves predictably over time. It is possible to charge rates which reflect the true risk.

I think it should be fairly clear why these are desirable features. For example insured individuals and insurance companies don't trust each other. So the fewer things to argue about the better. Hence it is desirable that losses be rare and clear cut.

It should also be clear that individual health insurance (particularly as currently provided) is not a very ideal insurance product by these criteria. Life insurance on the other hand scores better. So it should be no surprise that the life insurance market functions better.


  1. Spoken like a true mathematician. Unfortunately, the risks are not easy to compute. I'm sure the insurance companies would agree with you that losses be rare. That way their profits would become even greater.

  2. The conclusion that I draw from Shearer's remarks is that, since current commercial products are poorly suited to the need, most likely necessarily so, we should try something else, such as giving government a larger role.