Tuesday, June 16, 2009

Trouble Indemnity 3


Night Watchman: How’s the insurance business, Mr. Neff?

Neff: Okay.

Night watchman: They wouldn’t ever sell me any. They say I’ve got something loose in my heart. I say it’s rheumatism.

Neff (Scarcely listening): Uh-huh.

Night watchman looks around at him, turns away again, and the elevator stops.

Night Watchman (Surly): Twelve. *

The insurance industry lives and dies by numbers and probabilities. They are making a bet you and I won’t die in the next 90 days, won’t run our car into a tree, won’t have a house fire. In order to survive, they need to know how likely each of those is. In what have to be two of the only movie scenes that make insurance actuarial statistics seem really cool, in Double Indemnity Barton Keyes (Edward G. Robinson) first recites an ode to claims adjusters:

“To me a claims man is a surgeon, and that desk is an operating table, and those pencils are scalpels and bone chisels. And those papers are not just forms and statistics and claims for compensation. They’re alive with drama, with twisted hopes and crooked dreams. A claims man, Walter, is a doctor and a blood-hound and a cop and a judge and a jury and a father confessor all in one.” **

Keyes later rattles off (by my count) twenty-eight different actuarial categories of suicide (“suicide by poison, subdivided by type of poison, such as corrosive, irritant, systemic…”) and then concludes “Of all the cases on record there’s not a single case of suicide by leap from the rear end of a moving train.”

A crucial economic problem behind all of these numbers is that individuals may have differences in how likely they are to generate a claim. The differences are typically unobservable ( a driver's inherent skill and care in driving) but perhaps correlated across the population with things we can observe (look at what happens to the automobile insurance rates of young men when they get married). Or, they could be directly observable (a person's accident record). And, depending on the particulars of how a policy is crafted and priced, the actual probabilities of a claim of the people who buy the policy maybe higher than that of the general population. This is called the adverse selection problem, and it’s why the Night Watchman couldn’t buy life insurance (at least not at a price he was willing to pay). It isn’t just in the movies. Dealing with the adverse selection problem is a responsibility of being a good steward of resources if you are in that business. And, I think it’s one of the thorniest problems in the health insurance debate.

As I’ve followed the discussion of different proposals on health insurance, I keep seeing the adverse selection popping up like Whack-A-Mole. In proposals to move to more competition in health insurance, making the market look more like other kinds of insurance, a question that can’t be avoided is the following: “If we re-boot the nation’s health care system to a more-market oriented approach, what do we do with the people who are already sick? Who will sell them insurance (or otherwise pay for their medical needs)?” As Christians we have an explicit Biblical mandate to worry about this problem.

One historical solution to adverse selection has been group ratings. The insurance company sells to an entire category of customers large enough that there is little adverse selection relative to representative groups in the population (or at least the level of adverse is manageable). But this is one of the historical forces behind why we have employer-based health care. (It’s not by any means the only such reason, as I’ll discuss in the next installment). On the other hand, health care economist Scott Harrington argues that one of the reasons that the Obama administration’s “public option” will inevitably produce something close to a single-payer government monopoly is “the fixation of many reform proponents on attempting to ensure that no person's premiums or coverage terms will be related to health status.” If health status plays no role in setting premiums, we have abandoned the idea of health “insurance” and simply have a system of bureaucratically rationed socialized health care.

To me, the trick, economically, politically, and as a matter of Christian morality, is to come up with some system that is informed by our successes and failures in how we deal with similar problems in areas like bad drivers in automobile insurance and special geographical conditions (flooding, hurricanes, earthquakes, wildfires) in homeowners’ insurance. This could involve using some of the same institutions. Or, it could involve Christians thinking outside of the 20/21st century box, and returning to ideas of private cooperative religious institutions that once flourished in the United States.

* ) Screenplay by Billy Wilder and Raymond Chandler, based on the novel by James M. Cain. Available at www.imsdb.com.

** ) As a mea culpa, economists (among others) should admit that we missed the fact that mortgage documents tell stories of real drama of real people, and that 1000 banks each owning 1/1000 th of 1000 mortgages does not create the same incentives as 1000 banks each owning one mortgage.

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