October 31, 2009

Why Insurers Won't Insure You (H1N1 anyone?)

You can't always get what you want.
--- The Rolling Stones

You've got the money. What you want is legal and widely available, but you can't buy it. Who would turn you away? An insurer.

This isn't because of supply and demand. After all, an insurance policy is just a printed promise. The quality of the promises varies, but there's plenty of paper to print them.

Why Refuse Motivated Customers?
Conventional wisdom says that insurance is sold, not bought. If you're interested in getting coverage, you're viewed with suspicion. Who wants to buy insurance? Maybe you know something you think the insurer won't find out.

We're self-motivated to buy insurance when we think we're likely to get a higher-than-normal payoff. If we win, the insurer loses.

Underwriters classify risks. Bad risks pay more if they can even get protection. You undergo a similar process when you apply for a mortgage. The higher your creditworthiness, the more you can borrow and lower the interest rate you pay. Similarly, insurers look at your health rating and your finances.

Asymmetry Of Information
What if you know something the insurer doesn't? You stack the odds in your favour. Insurance spreads risks among large groups with similar characteristics. Smokers die younger and have more health problems. Suppose a smoker pays the same price as a nonsmoker. By overpaying, the nonsmoker is subsidizing the smoker. That's unfair. Insurers try to assess each risk fairly and charge accordingly.

Fear Motivates
Since we're attentive to bad news, the media gives us plenty (unless you live a low noise life). Take the current "swine flu" (2009 H1N1 Flu). In previous years, we've warned about West Nile virus, SARS pneumonia, mad cow disease and avian flu (H5N1).

If you've had a bout with a disease, you may want to buy insurance and find you can't --- especially if you were hospitalized. The insurer may require that you wait months to show that you've recovered. By then, you may forget or lose interest. The insurer would rather turn away business than take on an unexpected risk.

Podcast Episode 41 (3:04)

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