Tuesday, February 12, 2008

Arnold Kling gets real on the insurance industry

He says:

The insurance industry may be the only private-sector institution that I trust less than government. In auto insurance, I find that unless I change providers every few years, my premiums just get ratcheted up for no reason. I think that life insurance is a huge rip-off, particularly considering that it starts out with a tremendous tax advantage.

I do not trust my fellow consumers to understand the concept of insurance well enough to make insurance companies offer products that make sense. Too many consumers think that good insurance is something that provides payouts for small problems rather than protection against rare catastrophes.

In fact, as I have pointed out before, most people do not want insurance of any sort. They get homeowners' insurance to satisfy the mortgage lender. They get car insurance to satisfy the state. They get health insurance only when they think their employers are "giving" it to them.

The insurance industry is heavily regulated, and it has gotten quite cozy with that arrangement. My guess is that something like the Massachusetts health care mandate, which completely eliminates any meaningful form of competition but which leaves the private insurance companies still standing, appeals to the typical insurance company.

My wife recently sought information on long-term care insurance. What I concluded is that we would be trading one risk for another. Now, we face the risk that long-term care would eat up our savings. If we had insurance, we would face the risk that the insurance company would not pay a claim, because of how it reads the fine print in the contract. I'd rather take the risk I understand--having my savings not accumulate--than the risk I do not understand--getting into a dispute with the insurance company over a large claim.

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