Two scams, both bad

Good piece in Sunday's paper on the PPR -- the poor people's rate, or the premium that poor and working classes are charged over and above what the rich charge one another for the same goods and services.

If that sounds to you like contentious rhetoric that overstates the case, then please read the article: "Lower income can mean higher rates."

Insurers often factor in a driver's occupation and/or education level when setting rates.

The practice is legal in Delaware and all but a handful of other states.

But critics charge there's no valid reason why a lawyer should pay less for insurance than a waitress with the same driving record, and that the practice results in minorities and low-income drivers paying more. And the difference in rates is more than spare change.

A 2007 report by the Florida Office of Insurance Regulation found the premiums one company charged Florida drivers varied by as much as 200 percent, depending on a driver's occupation and education level.

The department found that under some plans, drivers "with more professional occupations (doctors, lawyers, architects), and advanced college degrees" received preferred rates while blue-collar workers and those with a high school education paid more.

"It's not obvious to me why a clerk is a worse driver than a CPA," said Robert Hunter, director of insurance for the Consumer Federation of America.

Let me repeat that one line:

A 2007 report by the Florida Office of Insurance Regulation found the premiums one company charged Florida drivers varied by as much as 200 percent, depending on a driver's occupation and education level.

The PPR, for auto insurance, can be as high as 200 percent. That's hundreds of dollars. Every year. Hundreds of dollars charged to people who, by definition, do not have hundreds of dollars to spare and charged because they do not have hundreds of dollars to spare.

The game is rigged.

* * *

John McCain seems to have forgotten the First Rule of Holes when it comes to his goofy proposal for a "gas tax holiday."

The Arizona senator's Big Idea is to help Americans at the pump by diverting an additional 18 cents of the price of every gallon of gas to the profits of the oil companies. The effect on what we're all paying to fill our tanks would be negligible -- far less than 18 cents a gallon. But the side effect -- an $8-$10 billion windfall for the oil companies taken directly from funds needed for highways and bridges -- would be six different kinds of bad. That side effect is so vastly disproportionate to the purported aim of this policy that it's difficult not to suspect that this side effect is really the proposal's primary purpose.

You'd think at least one of McCain's advisers would point out that transferring billions of dollars from the public coffers directly into the pockets of ExxonMobil and Royal Dutch Shell seems like a dumb thing to do while running for office. Trying to spin such corporate welfare as help for working families just adds insult to injury.

But McCain is defiantly proud of his hole and he's determined to keep digging. Economists have uniformly panned McCain's proposal. In the words of MIT's Joseph Doyle, economists "are as close to unanimous as it gets in viewing the proposal as a horrible idea.” Undeterred, McCain struck back: "I'm not going to put my lot in with economists," McCain said.

What more evidence do you need that this man is simply a carbon copy of George W. Bush? That McCain would stoop this low, cloaking himself in populism while sneering behind his hand that the people are too stupid to realize his shell game won't help them, just his corporate masters, just goes to demonstrate that ...

Wait, what? It was who?

You're kidding.

Well, that's just ... it's ...

Is there a word that conveys both extreme disappointment and outrage? Because that's the word I need here.

Comments

[cjmr]

Yes, let's just put more money in the pockets of ExxonMobil -- because an only 17% increase in profits in the first quarter of 2008 (over first quarter 2007) is just too low.

/sarcasm

*bangs head on desk*

[cjmr's husband]

Remind me if they manage to pass the so-called "gas tax holiday" to fill the tanks two days before it goes into effect.

What are the chances that the gas companies *won't* raise the prices 25 cents before cutting off the 18 cents tax?

[Richard Hershberger]

The Poor Person's Rate is a drum worth beating. In my experience, this is one of the biggest things that middle class people simply don't get when trying to understand poverty in America. Car insurance is a particularly blatant example, but it applies to simple retail purchases.

The wife and I just dropped over two hundred dollars at the local price club stocking up on formula and diapers and similar supplies. That is a lot of money, but the supplies will hold us for quite some time. We could do this because because we have the resources to get to a price club, to buy a membership, to transport the supplies, to store the supplies, and most importantly, we have the funds available to buy the supplies. The same amount of stuff purchased piecemeal from a nearby drug store, or even a supermarket, would have been much more expensive. We are fortune to get the Middle Class Discount.

[Praline]

"I'm not going to put my lot in with economists," McCain said.

He actually said that?

So exactly what plans does he have for the economy?

I'd like to see this kind of thinking extended. Maybe the day will come when he decides not to put his lot in with politicians.

[Cathy W]

McCain didn't say it. Hillary Clinton did.

I was appalled - we've had 7+ years of expertise being dismissed by a President who preferred the opinions of his gut, and I'll be damned if I vote for four more of the same, no matter whose gut is in question.

[Tonio]

I absolutely agree that the gas tax holiday proposal is simple pandering. But would someone explain to me exactly how the holiday would benefit the gas companies? Is that because the price of gas would not change with the tax removed temporarily, so the gas companies would receive the 18 cents?

[cjmr]

Is that because the price of gas would not change with the tax removed temporarily, so the gas companies would receive the 18 cents?

Call me cynical, but I honestly do not think the fuel companies will require their franchisees to drop the gas prices by that 18¢. Independent stations may or may not drop the price--but if they don't, they'll be the ones that are gouging.

Question: Obviously the station owners are the ones responsible for collecting the taxes at the pump--who is responsible for actually paying the taxes to the feds? Do the individual station owners pay it directly, or is it part of the fuel cost they pay to the supplier?

[Boze]

Brilliant! I was actually getting angry with McCain

[Pepper]

Possibly the phrase you're looking for is "shitting kittens," Mr. Clark?

[mike timonin]

Call me cynical, but I honestly do not think the fuel companies will require their franchisees to drop the gas prices by that 18¢.

Ok, you're cynical. :> Doesn't mean you're wrong. This, if I understand the argument correctly, is exactly why Obama does not support the holiday, even though he supported similar holidays while in the Illinois state senate - you can lower the taxes, but you can't force the oil companies to lower the prices. Consumers never saw the benefit of the lower taxes in Illinois (and so Obama voted against extending the cut in that instance), and there's no real reason to believe that consumers would see the benefit this time around either.

At the end of President Ford's administration, the government removed price restrictions on oil. Despite efforts since then to keep the price of gasoline at a reasonable level, and the profits of the oil companies at something less than laughably huge (for instance, the "Profit Windfall Tax" enacted under Carter's admin - a notable failure), the end result has been steadily rising gas prices. Unlike the '70s, I think we've reached a point where gasoline is becoming a special commodity, like bread in the 18th century - unaffected by Adam Smith's basic laws of supply and demand. As the price goes up, we buy more, just in case the price continues to go up, thus increasing demand, thus driving the price up further. Having no viable alternative to the commodity (if you have trouble buying bread, it's unlikely that you'll stop buying expensive bread in order to buy less of something that costs more.), we keep playing the game. I think that the solution is some sort of government control of gas prices, or oil company profits, or both. But then, I'm a filthy socialist who thinks we should do away with money entirely, so what do I know?

[Jon]

Do the individual station owners pay it directly, or is it part of the fuel cost they pay to the supplier?

If I recall correctly from when I worked in a grocery store that had an attached gas station, the taxes are paid to the supplier (nosed around through some receipts that were sitting on a desk in the office I worked out of). What was amazing to me was just how razor thin the profits on gas sales were. In some cases, after all of the taxes and fees paid by the station on top of the price of the actual gas itself, it was about one cent per gallon. Guess it's a good thing for the owners and operators that it's a volume-based business model.

[David]

Here in Massachusetts, we've had a continuous fight between insurance companies, who would love to use every piece of information imaginable in their rates, and consumer groups and some of the better politicians, who wouldn't. Progress has been in rather the wrong direction lately.

It's problematic. Insurance companies are able to successfully broadcast TV propaganda about how Massachusetts insurance rates are the highest in the nation (true) and would drop so much if only insurers were allowed to run things the way they want to. They leave off the fact that insurance rates are the highest because accident rates are also the highest, which makes their second point nonsense. But people still believe it.

And yes, the rules have been successfully changed now to use things like marital status, credit scores, and so on. And when they're forbidden from using some factors (like age), they just find proxies (like how long you've held a license).

Even worse, a lot of this is accomplished with ridiculous runarounds: okay, they can't use some factors to set the rates. So they'll set high rates for everybody. But hey! If you happen to be in a Certain Group (which, by law, cannot affect your base insurance rate), you may qualify for certain discounts! They can't set the rate according to these factors, but they can add discounts according to those factors. I'm not sure why that loophole is legal in the first place. Fantastic.

As for the Clinton stuff.... sigh. I supported her, and really thought she was the better choice -- Obama is great, but I really felt like we needed serious policy know-how to fix the mess we're in, and I felt like she had it -- and I stuck with her as the race got ugly, even when I wanted to scream at both candidates to just grow up and move on... and even after I wished she would concede in order to salvage party unity, I still had sympathy for her... but right now I'm very deeply disappointed. It's hard to see this as anything but the most blatant misdirection and pandering. I've had my disappointments with Obama lately too, but this... meh.

[Craig]

Is there a word that conveys both extreme disappointment and outrage?

Repugnant? Opprobrious?

Those both focus more on outrage than disappointment, but the former seems to be more at the forefront anyway.

[Amaryllis]

How about "scandalized"? Because I was.

Jon: that's why you never (well, hardly ever) see a gas station without some sort of mini-mart or convenience store attached. The profit on the gas sales is really minimal; the franchisees need to sell all that other junk just to stay in business.

[Naked Bunny with a Whip]

My understanding is that the tax is paid directly by the oil companies based on what they're doing at the refineries, and then passed along to the retailers as part of their cost.

volume-based business model.

Yeah, and the whole idea is to entice people getting gas inside the store where the stuff that actually makes a profit is located. That's why you don't see many plain-old gas stations anymore...they're either convenience stores, auto-repair stores, or places like Super Wal-Mart.

[Jon]

@Amaryllis: True enough, which is why the gas station at the grocery store worked so well and was able to offer the lowest gas prices, as it was enormously successful in its regular business.
Since I left (the store and the state), a Super Wal-Mart with its own gas station has moved in and has been pretty steadily eroding all of the grocery store's business, which is generally how things go when Wal-Mart comes to town.

[dbomp]

Mark Kleiman says that the tax is paid by the refiner, not the consumer or retailer, so your local thin-margin gas station wouldn't benefit one way or another.

[yagowe]

David: They can't set the rate according to these factors, but they can add discounts according to those factors.

Reminds me of the pizza places with their "FREE DELIVERY! (15% discount for pick-up)".

[cjmr]

the tax is paid by the refiner, not the consumer or retailer, so your local thin-margin gas station wouldn't benefit one way or another.

Okay, that pretty much guarantees that the the consumer isn't the only person who's going to get screwed here--the station owners will, too. IIRC, they have to pay the supplier when the fuel is delivered. So they might buy a tank of fuel for $standard-price+standard-tax on Wednesday, have the tax rebate (and lower their prices) over the weekend, and then have to buy their next tank of fuel for $standard-price+standard-tax the next Wednesday. There is no guarantee the refiner/supplier will give them a break on the fact that over the weekend they were selling the gas 'tax-free'.

[Kristy]

This, if I understand the argument correctly, is exactly why Obama does not support the holiday, even though he supported similar holidays while in the Illinois state senate - you can lower the taxes, but you can't force the oil companies to lower the prices. Consumers never saw the benefit of the lower taxes in Illinois (and so Obama voted against extending the cut in that instance), and there's no real reason to believe that consumers would see the benefit this time around either.

*gasps*

Wait, wait! So... you're telling me... Obama:
1) tried something to fix a problem
2) found out the hard way that the fix he tried didn't work, and
3) stopped proposing that particular fix?

Amazing! Brilliant! Why haven't other people ever thought of this incredible innovation of changing your mind when you're proven wrong???

Oh, wait. We knew that one already. It's called trial-and-error. What does it say about my cynicism level towards politics when I get honestly excited to see a politician actually utilizing logic I was taught in grade school? (Note: this is no way intended to be a slam on Obama, if I wasn't clear. He's doing it right. I'm just disappointed that seeing so many people doing it wrong means I get excited to see the baseline competence I should be able to take for granted from educated adults.)

[Naked Bunny with a Whip]

changing your mind when you're proven wrong???

Then you get called a flip-flopper. Look how many people are enamored by Bush's unwillingness to change his policies no matter how bad their results are.

[Craig]

Look how many people are enamored by Bush's unwillingness to change his policies no matter how bad their results are.

If Bush's approval ratings are any indication, that group is only limited to diehard Republicans (defined as the ones who will support anything a Republican politician does solely because it's done by a Republican) and Armageddon cultists. Granted, those constitute a sizable percentage of the population, but it could be a lot worse.

If, again, the approval ratings are right. I guess we won't know that until November.

that group is only limited to diehard Republicans ... and Armageddon cultists

And, most importantly, to a disproportionate percentage of the mainstream media.

[balt]

varied by as much as 200 percent, depending on a driver's occupation and education level.
That's outrageous! Especially since no matter what your occupation and education level, you have exactly the same likelihood of getting into an accident!

Or maybe not.

This statistic is meaningless without a corresponding statistic regarding differences in risk. I'm not saying the insurance comany is justified here, but we really don't have enough information to judge.

If a person with a high school education is twice as likely to get into an accident as a person with a PhD, then - yeah - he probably ought to pay twice as much. Unlike Mr. Hunter, I can imagine several potential traits that may lower a driver's risk for which education and occupation could be a proxy, including intelligence, analytical skills, risk tolerance and even likely commuting times, most of which are impossible for an insurance company to gather. Hence the proxy.

Risk, unlike rice, is not a fungible good. The product you are selling to a poor person may indeed have a higher price.

OTOH, Clinton's (and McCain's) tax holiday is indeed a bad idea.

[Dr. Letitia Wright]

The whole thing doesnt make sense but if you are busy and NOT really listening, it might win you over.

[mcc]

Especially since no matter what your occupation and education level, you have exactly the same likelihood of getting into an accident!

Is this your way of suggesting that depending on your occupation and education level, you have a different likelihood of getting into an accident?

Unlike Mr. Hunter, I can imagine several potential traits that may lower a driver's risk for which education and occupation could be a proxy, including intelligence, analytical skills, risk tolerance and even likely commuting times, most of which are impossible for an insurance company to gather.

While you have a valid point, the issue is whether those traits are accurate proxies. A driver in a low-paying job with little education may possess excellent spatial-relationship skills and have low tolerance for risk. The point of this thread is that the focus on education and occupation has the effect of rewarding the wealthy and punishing the poor. That may be inevitable with any policy that reduces people to numbers.

[rizzo]

When I saw her on CNN this morning, HC was saying she would make the gas companies PAY the $.18/gallon tax instead of the consumers. Of course, that doesn't make it any better, as the gas companies will just raise the price of gas $.36...$.18 to make up for the lost money and then another $.18 as a big 'screw you' to the people of the US for letting her charge them more money. Since Reich's blog post is from yesterday, I'm guessing she changed her tune a bit once she realized that the public would never go for giving free money to the gas companies.

[Grumpy]

"Hundreds of dollars charged to people who, by definition, do not have hundreds of dollars to spare and charged because they do not have hundreds of dollars to spare. The game is rigged."

This could also explain the increasing criminal penalties for driving without insurance. (At least, it's an explanation if the goal is to turn poor people into criminals.)

[David]

@ balt:

This statistic is meaningless without a corresponding statistic regarding differences in risk.

I seem to have seen this same conversation at this site before... however. This gets at the whole definition of what insurance is for.

Consider the optimal insurance business model: insurance companies develop technology to predict the future with 100% accuracy. In cases where they foresee that they will not need to pay out any claims, they offer insurance for a modest fee. Otherwise, they offer insurance for the price of the future claims plus a 20% service fee. They're guaranteed to make money on every single customer, so they're very happy.

This business model is stupid, obviously, since it means that no individual is actually being helped by insurance.

Now, since there can never be complete certainty about the future, insurance does and should exist in some form. But, just as in the case where insurers can completely predict all outcomes, it's not reasonable for companies to do anything they want to optimize their profits vs. payouts. It's probably reasonable to charge more for, say, people who have a poor driving record, for example. But it's not reasonable to charge more for, say, being non-white, even if, statistically speaking, that has a positive statistical correlation with traffic accidents, and would save the insurer (and its white customers) money.

Rates should be based on risks that the customers have some control over. If the customer chooses to take unnecessary risks, it is fair for their rates to reflect it. If they happen to be part of a social or economic class that makes a disproportionate amount of insurance claims, it is not fair to increase their rates independent of the individual customer. Otherwise you end up with pathologies like much of the country sees now, where a poor driver with a perfect driving record pays more for insurance than a rich driver with a bad record. Yes, statistically speaking, this works out for the insurance companies and many of their customers -- despite the individual injustices, the statistics are carefully tuned, and on average this makes them more money -- but the point is that this is still committing individual injustices. The careful, poor driver is, through the magic of insurance analysis, actively subsidizing the rich, reckless driver.

It will always be in the insurer's best interest to charge slightly more (or significantly more :-P) than they will actually have to pay out for a given driver, but that defeats the purpose of insurance. Insofar as insurance rates should vary, they should do so based only on variables that can at least be marginally influenced by the person who needs insurance. Otherwise we're doing exactly what this post is talking about, disproportionately charging the people who can least afford it regardless of whether they're actually responsible drivers. Insurance, especially since it is required by law, is not an industry where an entirely free market can function, since as far as the free market is concerned, by far the best strategy is to ignore the poor entirely. That's a very profitable strategy in many markets, but in the insurance market it's one that does an unacceptable amount of harm.

[Tonio]

That was me at 2:49 p.m.

[Froborr]

Insurance companies charge different customers different rates; that's a simple fact. Men pay more than women; younger people pay more than older people; married people pay more than single people. The reason is simple; if any factor correlates with more (and more expensive) accidents, then to make a profit insurance companies must charge more to customers possessing those factors, regardless of whether there's a causal connection or not. It doesn't matter if being poor makes you a worse driver (it almost certainly doesn't); if more people, on average, get in car accidents, even if only by random chance, it's still in the insurance company's best interests to charge poor people more as long as that stays true.

But that's not the question. The question is whether it's in the people's interests to charge poor people more for car insurance. That's why we regulate industries -- sometimes the best interests of the actors in an industry are at odds with the best interests of society at large. I say, the insurance industry can stuff it. They shouldn't be able to base rates on income or occupation.

[balt]

Yes, mcc, that's exactly what I'm saying. I am proposing a hypothosis: there is a statistically significant correlation between occupation and education level and many, many things, including a) likelihood of getting into an accident (which Fred doesn't even acknowledge) and b) income (which Fred seems to assume without proof - but I'm pretty sure he's right).

The question is whether insuarence companies are using these as indicators of wealth (the poor have fewer choices, so they'll pay our higher rates) or as indicators of risk (our statistics show people who work in X job are 20% more likely to get in an accident than average).

It may be that we don't want to allow that differentiation and prefer a situation where high risk people are subsidized by low risk as more "fair."

[g]

I think there are actually three different Poor People's Rate phenomena. They all have the same crappy end result, namely that poor people get screwed, but they work in different ways and I think they're different morally. (1) Rich people doing favours to one another. (2) Businesses courting the rich because rich customers are more profitable. (3) Practices that aren't discriminatory in themselves but that end up helping the rich and hurting the poor.

On the face of it, when insurance companies vary their rates on the basis of job and education it's an example of #3: allegedly, Poor People really are more of a risk than Rich People. (So the Poor People are paying more, but they're also *getting* more, namely protection against a larger risk.)

It's hard to believe that Poor People are really three times riskier than Rich People. So I suspect an element of #2, too. Notice that the article says *one company's* rates vary by a factor of 3 according to job and education. I'm going to guess that that company is trying to specialize in Rich People (because they expect to be able to sell them more lucrative kinds of insurance, or because they have a different risk profile and they can do a better job of estimating risks if they have a more homogeneous population to work with). If so, then the 200% figure is slightly (*slightly*) bogus, because the Poor People can go to other insurers while the Rich People go to that one.

(Only *slightly* bogus because one of the sucky things about many sorts of poverty is that you end up having way less leisure time for things like comparison shopping. I'm sure that company's salespeople don't say to Poor People who apply for insurance with them "You know, you can get a better deal from these other guys". But I bet it's not the case that *all* the insurance companies are grossly overcharging Poor People, because if they are then there's a great business opportunity for an insurance company that's prepared to try overcharging them less; and insurance companies are pretty good at spotting opportunities to make money.)

I wonder whether there's also something going on along the following lines: Insurance is always a monetary loss on average and in the long run, but (blah decreasing marginal utility blah) the amount by which a big loss hurts worse than a small one can be way out of proportional to the dollar amounts concerned. So you buy insurance against losses that are big enough that it would really hurt to pay for them yourselves. What counts as such a loss is very different for Rich People and Poor People. So if it turns out that somehow Poor People are less able to decide not to get insured against some particular kind of risk than Rich People, then the insurance companies can afford to charge them more than Rich People because they don't have the option of just not bothering. But I've no idea whether that's actually the case here; the article seems to be talking about the third-party automobile insurance that *everyone* has to have, which suggests not.

I'm inclined to agree that the world would be improved by making it illegal for insurers to base their premiums (or discounts, bah) on wealth or any proxy for it, except in cases where there's obvious direct relevance. (For instance, it should probably be legal to sell insurance against losing your job, and it should probably be legal for the cost of that insurance to depend on what the job is even though that correlates very strongly with wealth.)

[kodiak]

Is it Thursday already? I woulda sworn it was still Monday... /e checks timepiece for ticking noise

It may be that we don't want to allow that differentiation and prefer a situation where high risk people are subsidized by low risk as more "fair."

As was pointed out immediately above that post, the entire point of insurance, from the customer's standpoint, is that high risk people are subsidized by low risk ones. Risk pooling is what insurance is for, and it's why we have laws mandating it - to ensure that the risk pool is as broad as possible.

Otherwise it's just a savings account with a (massively) negative interest rate.

[David]

@ Froborr:

The reason is simple; if any factor correlates with more (and more expensive) accidents, then to make a profit insurance companies must charge more to customers possessing those factors, regardless of whether there's a causal connection or not.

While I agree with the spirit of your post, this part isn't quite true. In order to maximize profit, insurance companies must do this. In order to make a profit, it's enough to simply charge more than the average expected claim cost for a given category. For example, it would certainly be possible to make a profit by charging a single blanket rate for every individual: just charge slightly more than the average individual claim costs. Profit!

That's not a very popular strategy with either insurers or customers, of course. But the recursive division of customers into tiny sub-categories, combined with taking average risks of just that sub-category, serves primarily to minimize the difference between individual insurance rates and claim payouts -- that is, to minimize the individual advantage for insurance in the first place, while maximizing the advantage for the insurer.

Some subdivisions can be reasonable -- if you always drive at 100 mph and frequently run red lights, I'm not in a big hurry to subsidize your increased risk -- but there need to be some very strict standards about what is ethical (and since history shows insurers are not real big on the "ethics" thing, those ethical standards should probably be formalized as industry regulations of one kind or another). The situation today is crazy.

[Froborr]

David: This gets at the whole definition of what insurance is for.

I think you're confusing the purpose of buying insurance with the purpose of selling insurance. The purpose of buying insurance is, of course, to be protected from risks. The purpose of selling insurance, however, is to get as much money as possible while spending as little as possible, exactly the same as the purpose of selling anything else.

These purposes are fundamentally opposed, because of course the insurance company's goal is to undergo as little risk as possible itself while making as much money as possible. Laws which restrict the criteria companies can use to assess risk are good for the consumer and bad for the company, so whether you support them is a simple matter of which purpose you're more sympathetic towards.

Personally, I find the insurance companies' motives more than a little evil, so I tend to support such laws.

[Tonio]

These purposes are fundamentally opposed, because of course the insurance company's goal is to undergo as little risk as possible itself while making as much money as possible.

Sounds like a good argument for insurance co-ops.

[Froborr]

David: True. However, admirable as it may be to forego profit maximization in favor of ethical behavior, any company which actually does this is going to be squeezed out by its competitors very quickly. Individuals are capable of ethical behavior in the absence of laws mandating it because ethical behavior is rarely immediately lethal; corporations must maximize profits using any means they can get away with or die. Simply put, there's a selection pressure on corporations; the most successful will always be the most unethical.

Of course, that assumes a free market. Strong enforcement of strict regulations that mandate ethical behavior can make unethical behavior more costly than ethical behavior, and then the corporations which behave ethically thrive.

So, for somewhat different reasons, I agree with you: insurance companies need to be heavily regulated on what risk factors they can consider.

[cjmr]

Even if a poor person were 3 times as likely to get into an accident as a rich person (which I doubt), shouldn't the fact that the poor person is likely only totaling a $5000 used car vs. the rich person totaling a $25,000+ new sedan count for something???

True stupid insurance story -- when we moved from L--- to B--- our insurance rate went up ~$200/6 months, because "more cars are stolen in that part of the county". That, despite the fact that in B---, car #1 was going to be parked in a locked garage for most of the time and car #2 was going to be parked in a locked garage at night and in a totally different county with much different (lower) auto theft rates during the day. In L--- both cars were parked overnight in a communal open lot, out of sight of our flat, a much higher theft risk, IMO.

[David]

I think you're confusing the purpose of buying insurance with the purpose of selling insurance.

Well, right. By "what insurance is for" I meant "the reason for its existence." As far as the insurers are concerned, the goal is getting money for minimal risk, but if that's really all it was for, it wouldn't exist at all (and any number of industries could be described by the same "purpose").

But in insurance more than in most industries, the optimal corporate behavior is to charge people without providing any service at all (that incentive is there in other arenas as well, but insurance more than most sets corporations up to be able to actually get away with it). Like you say, the interests of the customer are actually irreconcilable with the interests of the insurer -- in most industries, there is some common ground that benefits both parties. That's essentially why insurance is an area where the free market fails miserably, and fails more severely as the insured object becomes more important (cf. American health insurance). I do find it a little odd that the "free market" is invoked so consistently to defend an industry that is already so heavily regulated (if only the regulations were the right ones), but ah well...

[Froborr]

I think what you're trying to get at, David, is not the reason for insurance's existence but, rather, its function -- what it is used for, not what motivates its creators. Insurance exists because insurance companies believe they can profit off of it. If they didn't believe that, they wouldn't sell it. Its function, however, is to protect the insured from the financial consequences of unforeseen crises.

[Stan Taylor]

Let's not forget that in many states, it's legal and standard procedure to base the insurance premium in part on the applicant's credit score. How messed up is that?

[Froborr]

Stan: From the company's point of view, again, it makes sense. A low credit score (supposedly) indicates fiscal irresponsibility, which presumably correlates with other forms of irresponsibility and therefore more expenses for the company. From a social engineering perspective, however, it's a terrible idea.

Also, random aside: whatever incompetent buffoon of a copy editor allowed "and/or" to creep into that lede deserves to be shot.

[SweetCraspy]

Sounds like a good argument for insurance co-ops.

I agree with this 100%. This is something I don't understand, so maybe someone can explain real world economics to me. If insurance is fundamentally risk-sharing, it's not providing much more than a big pile of money for people to draw on when they need it and then pay back when they can. Why couldn't a low overhead, not-for-profit company (that paid its employees decently-but-not-too-much) undercut every other insurance company out there?

Say, start off with a very rich philanthropist, so you've got an initial nest egg to fall back on. Get a bunch of people signed up at rates that are essentially break even. You still do the risk management stuff (so that at-risk people pay for their higher risk), but you don't gouge anyone. You set some "safe" cash reserve, and if you take in more than that you pay back insurance rebates to keep people happy. (I guess that if you take in less than that, you increase rates a point or so across the board to get back on track. Probably need some kind of hysteresis loop to stay stable.) The more people you get, the smoother the risk is spread and the easier it is to stay in business. What (legal) way can the for-profit companies compete with that kind of business model?

[David]

SweetCraspy:

A beautiful idea, that the current market effectively thwarts. Suppose you happen to be one of those upper-middle-class low-risk drivers. A "fair" insurance rate offered by the not-for-profit will be higher than the megacorp's rate, because the megacorp uses unethical data mining practices to calculate that you're a safer bet. You go with the cheap, high-quality insurance from the megacorp. The nonprofit gets left with the "higher risk" pool, so that even the low risk people in that pool end up paying a higher rate just for the money to break even.

Which isn't to say there's no hope of such a thing, I believe insurance co-ops can be very effective when they actually are put together, but unethical practices can always undercut the ethical ones for the "lucrative" customers. And by their nature, co-ops that are put together tend to be centered around middle class folks who are doing alright for themselves -- so while they're still better, both financially and ethically, than a lot of insurers, they aren't addressing the people who are most in need of help.

A side note: I'm in computer science, and have actually worked with some data mining techniques (nothing insurance-related :-P). You'd be amazed how much you can cut down overhead and such by the judicious use of statistics, and it's easy to see why this could be tempting: sit a few PhDs down in front of a huge database, and tell them to build an algorithm that effectively predicts the expected claim total for an arbitrary individual. They'll be able to do a damn good job, reducing the difference between predicted and actual claim costs phenomenally. But, as pretty much this whole discussion has been saying, just because you can make those predictions doesn't mean it's ethical to do so without regard to the consequences for the actual human beings involved...

I'm sure (in a hypothetical sense) that there are ethical uses for those kinds of techniques, that actually do positive, helpful things, but insurance is not such a domain....

[SweetCraspy]

Suppose you happen to be one of those upper-middle-class low-risk drivers. A "fair" insurance rate offered by the not-for-profit will be higher than the megacorp's rate, because the megacorp uses unethical data mining practices to calculate that you're a safer bet.

Are you saying that the not-for-profit could afford to offer the lower rate to the middle class person, but that it can't know enough without unethical data mining? What if the not-for-profit uses the same statistics (ethical or un, so long as they are legal) that other companies use. Not the ideal case, but wouldn't it still be lower cost for everyone?

[josh]

A Democrat selling half-baked economic populism? Say it ain't so, Joe!

If Clinton gets the nomination, it'll be interesting to see if she continues these protectionist rants, or decides to move towards the center and use Bill's more market-based economic policies.

[randlebrot]

Risk pooling is what insurance is for,

Yes, but if you're pooling a higher level of risk than me, it's not a conspiracy against you if you are charged more. Other people have already pointed out that Mr. Clark totally ignored the question of whether the factors insurance companies base their premiums on corresponds to the likelihood of accidents. I suspect that's because Mr. Clark knows that they do.

If it's immoral to base other decisions on someone's wealth, is it equally immoral to base means testing of govt social programs on someone's wealth? Just because someone else is poor doesn't mean he deserves more food stamps than I do. I don't consider that fair. :-)

But, as pretty much this whole discussion has been saying, just because you can make those predictions doesn't mean it's ethical to do so without regard to the consequences for the actual human beings involved...

It's immoral for a business to predict its costs? That's a new one. Now tell me why it's moral for the government to use statistics to predict costs when they regulate the economy. Isn't the whole argument against the market a claim that the smart people in DC know better (and can use things like stats to predict, and thus control, our behavior to get the 'best' result)? If knowledge is power, and private business using that power is immoral, why does that not hold true for bureaucrats as well?

What was amazing to me was just how razor thin the profits on gas sales were.

Between corporate taxes and gas taxes, Uncle Sam already makes more off gasoline than Exxon does (and it makes more off a cigarette than Phillip Morris does if you replace "gas taxes" with "sin taxes").