The four philosophies of insurance

There are a few ways of thinking about insurance, each of which results in different analyses of, or is motivated by a different concept of, what’s fair. Let’s look at them!

I might summarize the types of insurance as:

  • Enforced budgeting with collective bargaining
  • Insurance over time
  • Insurance over probability
  • Insurance over the population

Let’s take them one at a time.

Collective bargaining

You might purchase an insurance plan as a means of reaching a better bargaining position when purchasing goods and services for remediation or prevention. For healthcare, for instance, you may subscribe to a large insurer. They connect you to network of providers, and they promise their network of providers exclusive access to their patients.

The patients get better prices, and in exchange, the providers get more consistent work.

You can add other related services, like billing and sharing medical history, on top of this.

And related strategies like health savings accounts can function as budgeting aids, ensuring that you set aside an appropriate amount of money.

Strictly speaking, this isn’t insurance. However, it’s associated with health insurance companise. This model requires each individual to have enough money to pay for all the services they need, at the time they need them.

The notion of fairness that this uses is rather Ayn Rand in nature: if you haven’t produced enough to afford the care you need, you don’t deserve it.

Insurance over time

It’s hard to plan for irregular, unpredictable expenses. An insurance company with good actuaries can turn unpredictable expenses into predictable ones, given a large enough group of people.

You might earn enough money in your lifetime to pay for everything that will happen to you — every car crash, every broken bone, every cough and cold and cancer. But that car crash might happen when you’re still in college and not earning anything. Instead of going into debt, you can sign up for insurance in advance. The insurance company will assess the amount that it expects to have to pay on your behalf, and it charges you slightly more than that.

The notion of fairness this goes for is individualistic, rather libertarian: you need to pay for everything that happens to you personally.

Insurance over probability

I can’t predict that I would be struck by lightning, or that a cooking accident would give me third-degree burns, or that a car would hit me, or that I would be diagnosed with cancer. But an insurance company can. Or rather, it can’t predict for me specifically, but it can lump me into a risk group based on my behaviors and insure all of us according to its assessment of how likely those things are to happen to me.

In a more grassroots manner, I might get together with a group of other people with similar risk factors and behaviors, and we all agree that we’ll pay for all of our problems. The insurance company merely handles these steps for us — and combines it with insurance over time for our group.

This fairness is still individualistic, but it recognizes the existence of some bad luck that’s not your fault. This is good for things like car insurance: the likelihood of me causing an accident is largely determined by my driving habits. (Of course, as cars become more sophisticated with collision avoidance and the like, money can make up for a lack of caution, which isn’t terribly fair. However, under capitalism, that’s a type of unfairness we are not allowed to criticize.)

Insurance over a population

Unfortunately, the “probability” in insurance over probability only goes as far as things that the insurance company can’t track. If you have the misfortune to be born in Flint, Michigan, that’s a risk factor your insurance company can use to charge you more because you’re almost certain to have lead poisoning. If you were diagnosed with cancer while working for one company and using that company’s insurance, then try starting your own business, you’re screwed.

Insurance over a population shoves as many people as possible into one organization, which then pays for problems in severity order until the money runs out.

If I’m healthy, have behaviors that keep me healthy, and am lucky enough that I don’t have any other sources of misfortune that the insurance company can track, this means I have to pay more on average. But if I have a feature that’s no fault of my own that an insurance company tracks and charges more for, this means I don’t die.

This is a sort of fairness that emphasizes good outcomes over personal responsibility, which is especially appropriate for situations where people have very limited control over what happens to them. I have some control over whether I get certain types of diabetes; there are some behaviors I can avoid to reduce my risk of lung and mouth cancer; but most health problems I get aren’t really under my control.

At this point, you might be trying to line up various healthcare systems in this taxonomy. For instance, where does the Affordable Care Act lie? That was an attempt to push insurance over probability into insurance over a population. Why was the individual mandate important? Because that sort of insurance works best if the costs can be spread across the largest amount of people.

I hope you’ve enjoyed this survey of methods of insurance.