These days it’s getting harder and harder to save money while
maintaining a decent standard of living in much of the Western world.
There are many elephants in the room, and I intend to criticize modern
insurance. Let’s take the example of car insurance. The theory is that
throughout your many years of driving a car, there’s a positive
probability that you will get into an accident. Events for which
probabilities can be estimated can be defined in infinitely many ways,
many of which are valuable to actuaries. For example, if you are a
regular driver, there is a nonzero probability that tomorrow you will be
involved in an accident; there is also a nonzero probability that in
the next ten years you will be involved in seven car accidents, or that
you will never be involved in one for the rest of your days. These
probabilities can be estimated with much higher accuracy if the
actuaries have at their disposal information about your demographic and
biological traits, which is why you fill out a long form when signing up
for your insurance.
The job of actuaries is to find averages and other functions of random
variables that describe these events. Laymen have an inkling that
insurance companies are stealing their money, and their instincts are in
most cases right. This is surely the case when they signed a contract
against their will.
For the sake of simplicity, let us consider a contract that covers all
repair costs for your own vehicle and for damages to other vehicles for
which you are liable. In this case, the insurance company will access
their data for people who are “like you,” of which there are many. The
company will calculate the average of all repair costs for the owners’
vehicles and damages to other vehicles, let us call this number X. By
the law of large numbers, which is fair to invoke in this large-sample
scenario, the company will neither make profits nor losses if it charges
X to everyone who is “like you” for the same contract. For any other,
general insurance contract, the same number X can be found with the same
process.
The chief selling point for these contracts is that large sums of money
will have to be incurred if uninsured when an accident takes place, the
contract will allow you to spread the cost out in small monthly
installments. The lower and middle classes would often be unable to pay
what they owe and be then left in a situation more unpleasant than that
of paying insurance. The problem with modern insurance is twofold, and
both parts are intimately connected: Insurance companies charge (1+Y)X
for a contract, and Y is obscenely large. Government forces citizens to
buy insurance.
If Y was obscenely large but governments didn’t force us sign the
insurance contract, then fewer people would sign it, and profits would
reflect the true value of the contract, which is bad business. If Y was
chosen fairly, such that most citizens would voluntarily choose to buy
the contract, then the damage done by the obligatory nature of the
contract would be negligible.
How can we make insurance fairer than it is today? I propose to have to
general classes of insurance contracts: class A will be contracts
mandated by the government; class B will be the rest. For class B I
support the unforgiving free market, that market where lies and deceit
are all-too common. A market that can be so harsh, yet no guns will ever
be drawn, at which point the name is not trade but theft. For class A I
support a system where the government will be the supplier. A privately
held company will not be allowed to provide government-mandated
contracts. X will be calculated as explained before, and Y will be
chosen to cover other costs, like paying the salaries of the employees
involved. The books used to make these calculations will be open to the
public. In short, X and Y will be chosen to maintain a state of
profitlessness. Petty laws and useless officials will be avoided.