Tuesday, June 9, 2009

Trouble Indemnity 2


The concept of “moral hazard” in any insurance situation is easy to describe. Moral hazard is a possibility when the insured person and/or beneficiary can, after the signing of the insurance contract, engage in undetectable actions that make a loss more likely (or have a higher payout). A classic extreme case is the driver who doesn’t lock his car because it is insured for theft.

The entire plot of Double Indemnity is one giant moral hazard scheme. Phyllis and Walter take action to increase the probability that the Pacific All Risk company pays off on Phyllis’ policy on her husband. But, before Walter gets involved in the web of murder, notice what his friend Barton Keyes says to him about the problem of insurance salesmen who don’t pay attention to the problem of moral hazard:

KEYES: I get darn sick of picking up after a gang of fast-talking salesmen dumb enough to sell life insurance to a guy that sleeps in bed with a rattlesnake.

It’s a major source of controversy as to how much of a problem moral hazard is in health insurance. Yes, people smoke cigarettes, drink to excess, overeat junk food while lying in front of the TV, take drugs, engage in unsafe sexual practices, and jump out of helicopters on skis, just to name a few things. Less obviously, people avoid unpleasant diagnostic tests such as prostate exams and colonoscopies. The question for economists is whether any of this is moral hazard. Do people do more of these bad things (or fewer of these good things) because they have health insurance? This blog is not the place to answer that question, but there are many empirical studies that attempt to address them.

In the United States, one of the purported advantages of HMOs is that because of the more informal and more frequent contact between the HMO and the patient, the managed care system is in a better position to promote so-called preventive care, that is, an antidote to moral hazard. For example, my HMO will pay a part of my gym membership. Again, we would need to turn to more extensive statistical analysis to investigate whether these effects were more than anecdotal. But as long as we are dealing with anecdotal comments, never forget the immortal words of Mickey Mantle: “If I had known I was going to live this long, I would have taken better care of myself.”

** If anyone knows any annuity actuaries, I’ve always been fascinated by the concept of moral hazard in annuities. Because the annuitant is paid benefits because he is still alive, his moral hazard is to quit smoking, eat healthy, and run marathons well past the age of 80. The moral hazard of the insurer is to hope that he ruins his health to an early grave. A frequent comedic version of this in the movies is the elderly person with an annuitant right to live in a house or apartment that someone else wants.

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