What Liberals Do Not Understand About Insurance

What Liberals Do Not Understand About Insurance

--by Robert Arvay

(this commentary is freely available for reprint)

If liberals had the slightest clue how insurance works, they would never have allowed insurance companies to have any part of the Affordable Care Act, otherwise known as Obama Care.

The insurance companies have suckered the Democrats, and doomed Obama Care in the process.

To understand this, one has to understand what liberals do not:  how insurance works.

On the simplest level, it works like this:

Suppose you have built a house.  Several other people have built houses nearby, houses much like yours.  As with all such houses, there is a danger of fire.  This danger comes about because of such things as cooking accidents in the kitchen, a mouse eating through a wire, or lightning.  If this happens, the house could be damaged or destroyed, inflicting costs that could make the homeowner homeless.

To reduce the risk of becoming homeless, the homeowners get together and decide to form an insurance cooperative.  Each homeowner will contribute into a fund.  Money from the fund will pay for any fire loss to a home.  To seed the fund, the homeowners take out a bank loan, to be paid off in installments over a period of years.

That’s it.  That’s how insurance works.  Of course, this is the simplest case.  Let’s complicate it just a bit.

One day, there is a small fire in Joe’s house.  The damage is minimal.  But the neighbors ask Joe what happened.  He tells them that he fell asleep on the couch with a lit cigarette.  Fortunately, his wife saw smoke, and quickly put the fire out before it could spread.  Still, it was a close call.  It could have been much worse.

Everyone is glad that Joe is okay, but someone points out that only a small portion of the homeowners smoke.  Smoking cigarettes in a house increases the chance of fire.  That adds risk.  But why should all the non-smoking homeowners pay extra, for a risk that not all of them have?  If Joe wishes to remain in the insurance cooperative, shouldn’t he bear the extra cost of the extra risk which he is adding?

If this is not immediately clear, let’s compare it to health insurance.

If Joe smokes, and he has health insurance, he is at greater risk of developing health problems than non-smokers.  Should non-smokers pay for the added risk which Joe incurs?

This question, and others, are answered by the policy holders.  If an insurance company decides to charge the same health premium for smokers as for non-smokers, then they must raise enough money to cover the extra health costs that smokers have.

If they do this, then the non-smokers are free to find less expensive health insurance from a company that does not charge them for the added risk.  Thus, the smokers wind up getting charged more for their health insurance.

Is that fair?  Should it be legal for insurance companies to discriminate against smokers?

For an answer to that, let’s return to house insurance.  Joe has agreed to pay extra, to cover the added risk that his smoking places on the cooperative.

Then one day, Mack builds a house nearby, and the neighbors invite him to join the insurance cooperative.  Mack decides not to join.  However, a few days later, he rushes into the office of the insurance cooperative, and urgently requests to buy fire insurance.  Mack is in a hurry to do this, because his house is on fire.

Should Mack be allowed to buy fire insurance for his house?  After all, his house now has a pre-existing condition, and it would not be fair to discriminate against him.

These parables exhibit the simplest principles governing how insurance works.  They are simple, but far beyond the ability of liberal policymakers to understand and apply.

Liberals believe that everyone has a right to health insurance, even if they have a pre-existing condition that makes their risks much higher than the risks of other people.  They believe that even if people cannot afford health care, it should be provided to them free.

Mack has a right to a free house.  Why shouldn’t his neighbors have to pay for it?

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