Insurance is Sharing

 

State Farm Jingle

But like a good neighbor,
State Farm is there

Don’t let anyone tell you otherwise. Infinitesimal  is not zero.

Infinitesimal things are very, very small, but there is still something there. Zero is the total ABSENCE of ANYTHING. Humans may round things, and treat them as if they were zero,  but Mother Nature does not round. When there is a risk of something happening, then that risk can be small, but it is not, can not be, zero. If the cost of the risk is large, it is natural to try to pool that risk with others. That is what insurance is all about. If there is a risk that something can happen 1 time out of 1,000 and when it happens, there is a cost of $1,000,000, then the cost of the risk for each individual  is 1/1000 * $1,000,000 =  $1,000. Having to pay $1,000 does not mean the cost of the risk is $1,000, only that the risk has been shared. If 1,000 individuals have contributed $1,000 to a pool, then  $1,000,000 is collected and the unlucky individual gets the entire $1,000,000 to pay for that thing occurring. It is not winning, it is sharing the cost of losing. Yes, the individuals for whom the event did not happen, have paid $1,000, but they also had the peace of mind that if in the event that they were unlucky, then they could pay the cost in full.

That is what insurance is all about. Your insurance premium goes into a risk pool based on the odds of that risk. The payment is made by the manger of that risk pool. In the event that the insurance is public, like Social Security Insurance, the risk pool may not even cover all of the  administrative costs. In the event that the manager of the risk pool is a non-profit, such as Blue Cross, the administrative costs will be paid from that risk pool. In the event that the manager of the risk pool is for profit, e.g. Liberty Mutual,  administrative expenses and a profit may be made first before the risk pool pays the unlucky individual. ( Why do you think that Mutual is in the name. It is all about sharing, i.e. making it Mutual.)

The size of the risk pool should be commensurate with the risk. If the risk is 1 in 1,000 then at least 1,000 persons should be in the risk pool ( actually more than 1,000, but coming up with the exact number is why insurance companies employ statisticians and actuaries). Increasing the size of the risk pool may lower the cost to everyone in the risk pool.

However the cost to everyone in the risk pool can NEVER be zero. If you choose not to join the risk pool, then you may not have the ability to pay for the risk. That is why there is compulsory insurance. If an individual does not have the ability to pay for the risk alone, then someone else has to pay that cost. If society must pay that cost, then  society can also compel that individual to join the risk pool and/or take actions to mitigate the risk.

If you are not infected with COVID, then you can not spread COVID to others, and you will not have to pay for any medical treatments for hospitalization associated with COVID. However the risks of being infected with COVID are NOT zero.

Knowing that the risk is NOT zero also does not guarantee that you can join a risk pool. The ability to join a risk pool, i.e. get insurance,  even if you have a preexisting medical condition had to be guaranteed by the Affordable (health) Care Act, also known as Obamacare.

Risk is never zero. Acting as if risk is zero is the point of Aesop’s Fable of the Ant and the Grasshopper. The working Ant may be boring, but he is prepared when winter, the risk, comes, while the playful Grasshopper is unprepared. Only if there is no future can there be no risk. You may not want to pay the cost of joining a risk pool, but if there are costs,  and if you can not pay them, then what is the alternative? People who think that they will never lose, are the most dangerous losers of all. There is a difference between saying “I don’t like to lose” and “I never lose.”  The first statement may be true. The second statement is impossible.