The Samovar


Insurance (and the ruthlessness of capitalism)
September 20, 2007, 11:11 pm
Filed under: Capitalism, Economics, Manifesto, Politics, Risk, Surveillance Society

Insurance. Not the most exciting of blog subjects, although that hasn’t stopped Michael Moore’s film Sicko from making $24m in the US alone. It is a subject that fascinates me though, for the simple reason that I don’t understand why people get insurance most of the time.

The nature of insurance is that on average you lose money by having it. It’s essentially just a gamble, and the bookie always weighs the odds against you. Now, there is a real reason to have insurance, which is in the case where you can’t afford the cost if the unlikely thing happens. Insuring your house against being burnt down is a good example of this. Most people can’t afford to rebuild their house from scratch if it gets burnt down.

The other end of the spectrum struck me when I bought a mobile phone a while ago. The salesman tried to persuade me to get insurance for it. Now, the insurance was £20 for one year, which on the face of it seems a fairly minimal cost for the satisfaction of knowing that if your phone is stolen you will get a nice new one. However, the phone only cost me £60, so for it to be worth my while getting that insurance, I’d have to have a 1/3 chance or more of losing that phone during the next year. Obviously a bad gamble. I didn’t get the insurance, and 5 years later the phone is still in my possession. Score £100 for me.

That mobile phone salesman made me realise that insurance is almost never worth having, because the consequences of a loss rarely justify the amount you end up spending on all the different forms of insurance. Take cars for instance. Now, you are legally obliged to have third party insurance, but anything beyond that is a total scam. If your car is stolen, you can buy a cheap replacement for a few hundred pounds. It won’t be flashy, but it will be functional. A few hundred pounds is often less than a single year’s insurance. Comprehensive insurance is even more of a scam, because you either have to have an enormous excess (which means you end up paying for most of the repairs yourself anyway), or you pay enormously high premiums. It gets more complicated, but the basic facts don’t change once you get into the arcanae of no claims bonuses, insuring your no claims bonuses, and the fact that even having insured your no claims bonuses making a claim will affect your premiums anyway. These points struck home with me when an old car of mine was stolen, and I realised (too late) that claiming for it was going to end up costing me more in increased premiums over the next few years than the amount they were paying out – by quite a lot.

So when is it worth having? Well, it’s worth having if you really can’t cover the costs of something going wrong: i.e. basically house insurance (but possibly not contents insurance), and, in the US, medical insurance. That brings me neatly on to my next point. I just saw Sicko the other day (recommended), and one of the points it makes very well is that US medical insurers will do anything they can to avoid paying out. In the event of an expensive claim (exactly the sort of claim that justifies having medical insurance in the first place), they will investigate everything about your claim. If you have ever said anything untruthful or inaccurate on an application form or on the phone to them, that will void your claim. If they can manage to persuade a doctor to rule that the treatment is too experimental or not guaranteed to work, they won’t pay out. And to ensure that they can persuade doctors to make these rulings, they pay bonuses to doctors proportionate to how many claims they reject. In other words, even when insurance really does matter (and with medical bills often in the tens or hundreds of thousands of dollars in the US, it really matters) it might end up having been money wasted.

Now, finally I’d like to twist this into a rant about capitalism in general, because, you know, I like to rant about capitalism. It’s my thing.

This story about insurance being essentially a scam, an enormous rip off, and one that disproportionately affects the poorest, is a sort of microcosm of the ruthlessness of capitalism. Because poorer people can’t cover losses as much as richer people, they are more in need of insurance. Perversely, this means that they end up (quite rationally) spending more of their money on insurance than wealthier people.

A more recent development is social sorting, where poor people actually get larger premiums or bills precisely because they are poor. I’ve written about this before, here, here and here. This sort of thing just underlines the fact that the nature of capitalism is that the poor get poorer, and the rich get richer. Now, this has always been true of capitalism, but for a while it was masked. The introduction of the NHS and the welfare state in Britain made capitalism slightly more humane, but it is being undermined, even though the NHS and the welfare state still exist, because of social sorting.

The problem is that as companies know more and more about us, they can extract money from us ever more efficiently. Not only can they do this, but in a competitive market they must do it if they can, because otherwise someone else will. Exploitation of every source of profit isn’t a choice for a capitalist in a competitive free market, it’s a basic necessity. So, assuming that it is profitable for a company to, say, offer cheaper insurance to “intelligent” people, they will all have to start doing it. The logic of capitalism then undermines many of what we think of as social goods. We think it is bad that smart people should be given cheaper insurance than others, because it’s not fair, and also because smart people probably have more money; we think it’s bad that poor people should pay more for the same thing than rich people, but that’s not what’s going to happen because it doesn’t fit in with profit seeking.

Finally, to go back to insurance, the consequence of insurance companies having ever more accurate information about us, and being ever better at evaluating our individual risk levels, is that it becomes self defeating. If you can predict entirely accurately who is going to have a heart attack, then there cannot be medical insurance against having heart attacks. Someone who isn’t going to have one won’t pay because he isn’t going to have one, and someone who is going to have one is going to have to pay anyway so why bother giving extra money to the middle man. Insurance companies have to get better and better at predicting this sort of thing to stay profitable, but by doing so they bring about their own demise.

In this situation, the only thing to do is to have national insurance schemes organised by the state. The purpose is not to spread your own risk (you can’t change who you are, or your congenital risk of heart attack for example), but to spread the good and bad fortune of our circumstances out amongst everyone. In other words, in the long term, effective insurance cannot be provided by a capitalist system, and the alternatives available to us are ruthless capitalism which by its internal logic must get more and more ruthless to stay profitable, or some sort of socialism.

If you have got this far, well done, I’m impressed! and I thank you. Please do write a comment, if only to say you made it to the end. ;-)

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18 Comments

I did get to the end..but my last comment (on googling in English) is in your spam box.

I guess this relates to the good old Crisis of Capitalism. If wages are forced down, consumers can’t afford goods. If consumers are paid enough, nobody can make goods at a competitive price and thus turn a profit in an aggressive market).

As usual, Marx got there ahead of us.

Comment by Edward the Bonobo

Also…in the case of insurance, isn’t the product that’s being traded Inequality of Information? I’ll have to think about that.

Comment by Edward the Bonobo

Yeah, I got to the end too, but will first comment on what was said at the beginning.

Re: insurance for things like mobile phones or laptops.

I’ve never lost a mobile phone (yet) so the idea of paying insurance on one, especially when you can always find a special offer going somewhere, and especially if you change companies, basically getting a new phone for nuthin, kind of puts the kibosh on that.

Laptops, cameras, etc … again. Our laptops don’t tend to leave the house. And my camera is already out-of-date and I’d like a newer model, so I really wouldn’t care that much if I lost mine.

Home contents insurance is another matter, but I’ve never been able to work this one out. I only had it once back in Toronto and I took photos of all the things I thought were worth anything just in case. But what about replacing all your clothes and shoes, etc? Is this sort of insurance actually worth having?

I’m really wanting to see ‘Sicko’ … but don’t get me started on the US manner of dealing with their citizens with regard to health care. I know of no other country in the ‘western world’ that treats its citizens so badly in this respect. That it also happens to be the most powerful country in the western world leaves me reeling. How the hell do they get away with this? Why don’t the US citizens protest en masse? It’s frankly barbarian. That someone showing up at a hospital emergency centre would be turned away because they either don’t have insurance or cash or enough credit on their credit cards.

In Canada no hospital is allowed to turn anybody away – it’s the law. Illegal immigrants, whatever. They treat first, ask questions later. The same thing happens in Spain, something I know about firsthand as I’ve had to bring two visiting friends to emergency here and … no problem. Sure, they take personal info and say they will probably be sending a medical bill later on, but as far as I know this has not happened. Or if it has, it hasn’t been pursued by big knee-cap breaking guys with baseball bats.

How can any doctor worth his salt agree with turning away patients in need of immediate medical assistance? Well, okay, they usually get turned away at the reception desk, but the doctors are still a part of this heinous scandal. How do they live with themselves?

Okay, shutting up now as I can feel my blood pressure rising …

Comment by azahar

Ed, yep, I think it’s a very similar thing to that. Also – your comments have been rescued. Not sure why linking to Google gets you put into the spam box, but there you go.

az – sounds like you should definitely go and see Sicko, but expect to come out with dangerously high blood pressure…

Comment by Dan | thesamovar

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Got to the end, with very little difficulty and few longueurs. As you mention in a later post, it beggars belief that the UK system should be goingh down the US route. If I didn’t know that the Labour party had roots in socialism, I wouldn’t believe it now.

Comment by Ian Appleby

Hey Ian, thanks for the comment. Yes, I was just too young to vote in 1997 when Blair got into power. That means that I’ve never voted for them (because it didn’t take long to realise they were a new party of the right), even though they ought to be the natural party for someone on the left like me to vote for.

Comment by Dan | thesamovar

I was “still up for Portillo”, cheering as the Tories went down one by one. If only I’d known. And of course the question now is, is there a natural party for those of us on the left? Seems to me as though Green is the least worst option, but it would be nice to vote for a party that has at least an outside chance of seeing the inside of Westminster.

Comment by Ian Appleby

I was ‘still up’ too, but couldn’t vote.

Like you, I’m voting Green now, but I agree it’s a problem. I think the best hope for us is some sort of deal between the lib dems and either labour or tory where the price of the deal is proportional representation.

Comment by Dan | thesamovar

Insurance is worth having, of this there is no doubt, Insurance companies are there to make a profit so they will payout as little as possible, this is their shame, and in the bigger scheme of things, the shame of capitalism and the politicians who support it.

I have had multiple forms of insurance and never lost money, because I considered the odds and insured appropriately, however, 75% of my claims have been problematic. Life is a lump of s*** and then you die. Our stupidity is that we let them get away with it, however they are clever. The way to keep the peasants from revolting is to give then a vested interest in the status quo, and if they become big enough to be a threat, invite them into the scam. Which is the nature of capitalism and monarchy and religious establishments. Monarchy is particularly blatant about this, become popular and they invite you into a special club with a medal to show you are a member and a special name which all the other members use and pay homage to, clever little queeny. And politicians will let it all happen because they do not get votes from spoiled vested interest.

The biggest insurance scam is Pensions, you save up for an annuity which pays you until you die, (the interest only), which they know the stats on how long that will be, and then when you die they keep the annuity. You are better off investing in something and then when you die you get to pass the remainder on to some-one of your choice.

The answer is to get clever and buy clever, long live selfish individualism, oh an you could make a bigger claim, after all you are expected to.

Comment by Mikey

Yeah, maybe you can sometimes beat the insurance companies because you have more information than them, but the whole thing relies on most people not doing that. It’s like any form of gambling. It is possible to make a living from professional gambling, but it requires a lot of effort. Better not to play at all. Same with insurance, unless – as I said – you can’t cover the costs.

Comment by Dan | thesamovar

Insurance isn’t quite like gambling. Here’s why. Below are the possible outcomes in order of advantage for gambling.

1. Bet and win.
2. Don’t bet and lose
3. Don’t bet and win
4. Bet and lose.

And for insurance
1. Don’t pay and don’t suffer loss
2. Pay and don’t suffer loss
3. Pay and suffer loss
4. Don’t pay and suffer loss

In both cases, the order of 2&3 isn’t entirely clear. With gambling, you are opting for the extremes – the best and the worst outcomes. With insurance you are opting for the two middle outcomes, and ruling out the best and worst.

I suppose with insurance it depends on the model. Friendly societies offered insurance as a way of spreading risk, with no profits being made, so it could be done in a socially responsible way.

Comment by Otto Fisch

Hi Otto – that’s a neat way of putting it. It is still a gamble though, it’s just a gamble with different payoffs to a typical bet.

But yes, the point of insurance is spreading risk. The first (fairly minimal) point I was making is that often people purchase insurance when they don’t need to spread their risk because they can afford to cover their losses. Mobile phone insurance is a good example of this for many people.

The second point is that capitalist insurance companies aren’t interested in helping a group to spread its risk, they’re interested in making a profit. The logic of profit actually undermines the socially valuable risk-spreading function of insurance (because by using what you know about people to better predict their likely claims, you can undercut your competitors).

Comment by Dan | thesamovar

Aha! Found it by using ‘Search’…

I accidentally left the radio on so heard some of R4’s ‘Moneybox’ on Saturday. A leading seller of pension annuities is now offereing different annual payouts, dependent on postcode. For once this is apparently in the interests of the poorer purchaser. Based on postcode they will offer more</i) anually for those living in poorer areas where life expectancy is lower, on average. The rationale is that this would even out against the those who will live longer but get payed less per annum.

Interestingly, that was only part of the justification given. The company spokesperson was quite open in saying that they are responding to market forces. I guess they are trying to attract a larger differential share of those with lower life expectancies.

Is this an example of ‘the market will sort it out?’ Maybe. I’m wondering, though…will the overall market effect be that those in poorer postcode areas end up being offered more relative to other customers of the same company – but by companies who are less competitive overall.

Comment by Edward the Bonobo

Oops. Forgot my closing tag.

I was “still up for Portillo”,

I saw it in a hospital maternity suite. :-)

Comment by Edward the Bonobo

I think with these free market type arguments (which I’m using myself) you have to give the system a bit of time to settle down because firms don’t change their policies and products instantly.

In this case, if you have a scheme which is essentially transferring money from the better off (life expectancy wise) to the less well off, then all it takes is for another company to come along, ignore the less well off, say, 5% of the first company’s market, and reduce prices for the remaining 95% and they capture 95% of the original company’s market. A business model that can be undercut in such a straightforward manner isn’t sustainable in the long term.

They might be doing it because they will capture customers in the short term who will then tend to stick with them even when prices go up, or for some other more complicated reason.

Comment by Dan | thesamovar

Indeed. Markets can’t be directed towards an end, whether social justice or other.

Comment by Edward the Bonobo

[…] written before several times about aspects of my opposition to capitalism (here, here, and here amongst other places, and also about parecon, an alternative to capitalism), but never attempted to […]

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