JCL Blog

How Data Changes the Idea of Insurance

The more we know the less we need insurance.  The whole idea of insurance is to protect oneself against an unknown potential loss.  Insurance works because of pooled risk.  A group of people with diverse risks contribute into a pool.  The funds paid by those not experiencing a loss are paid to those who experienced the loss.  Along the way the insurance company gets paid a bit for managing it all.  This applies to all insurance of course.   Hear are some thoughts about health insurance.

People were much more willing to accept this structure when they were reminded daily of the risks inherent in life and their general inability to avoid those risks.  Insurance companies were much more likely to be satisfied with this arrangement at a time when they had no way to know who presented the greatest risk to the pool.

All of that is different now.  Many people believe they have enough data about their exposure to risks -- that they may not need insurance at all.  When employees pay their full healthcare premium they can easily see that they are paying out more every month than they are getting in benefits.  Combine that with a sense of security regarding potential risk and you get a pretty good explanation for some of the 50 million uninsured in the US.  The fact that 27% of those aged 18-29 are without insurance and 28% of those making under $36,000 go without insurance -- compared to the national average of 16% -- leads me to believe that many of the uninsured could afford insurance.  A study conducted by Mark Pauly of the University of Pennsylvania and Kate Bundorf of Stanford, concluded that nearly three-quarters of the uninsured could afford coverage but chose not to purchase it.  (this last sentence was lifted from this article on the Cato Institute web site).  

The greater ability to analyze data has given insurance companies the hope of making money off of every customer -- instead of the pool.  This can be done through the all too common tactic of just denying every claim -- which ends up contributing to more individuals opting out.  It can also be done by gathering more and more data about the risk associated with each additional insurance customer and customizing the pool to have as little risk in it as possible.

As we progress down this road, we leave the realm of insurance and enter into the realm of expense management.  Maybe if we just let the industry evolve on its own, we will end up with more and more individuals responsibly managing their health care expenses on their own.