Insurance Companies🛡Vs. Casinos 🎰
A lot of people view their insurances as giant greedy institutions from which you’ve got to extract as much money as you can if you could. The logic behind this reasoning is pretty simple. and can be summarised by one image:
Yes. A casino. Think of an insurance company as a giant casino where all the customers are putting money into. Few of them will receive more than they initially put in it. Of course you’ll tell me that the insurance company is protecting you against future dramatic event but the current insurance system consisting of paying claims only after something bad happens creates Adverse Selection and Moral Hazard.
Quick exemples to define those principles (skip if you’re familiar with them):
Moral Hazard → you’ve got a corporate phone, because it’s not yours and you don’t bare the financial risk of breaking/losing it, you have no incentive to take care of it. Another common exemple is, of course, your insurance. Let’s say you’ve got a very good health insurance, you have very little incentive to take high care of yourself. We can argue and debate about that but it’s a phenomenon largely proved by many Economics studies.
Adverse selection → let’s take the example of the casino. You’re a professional cheater, but the casino don’t know it and let you play Blackjack at one of its tables. The information possessed by the Casino is not symmetric with the one possessed by the cheater. This phenomenon is obviously very common in the Insurance industry, an insurance company wants only low-risk customers so many people will hide informations in order to get accepted or to have a lower premium.
Let’s get back to the Casino comparison. Many insured people, because they do not receive any services from the insurance and do not feel the direct benefits of being insured will either cheat and declare false claims (around 10% of property-casualty insurance losses) or highly inflate any real claims. This in turn will inflate the overall price of the premiums, more people will feel cheated so they’ll try to cheat even more. It’s a vicious circle. Casinos are using extremely sophisticated software and surveillance to prevent people from cheating. Insurance are trying their best to do the same but it’ll be way too expensive to have the same level of surveillance as a casino.
Here in France, we have a very high level of social insurance. We pay a lot of taxes in order to be heavily protected from unemployment, accident, health issues, etc. This is exactly the same reasoning as the problem occurring within the insurance industry. We can hear everyday people saying: “I paid taxes for years so now I’m gonna get my money back by enjoying my unemployment insurance”. Paying for something that might or might not appear in the future while others are benefiting from the system makes you jealous and envious.
Another problem might be illustrated by this:
We all know that Casinos are making money by giving back less than they make. They’re not trying to hide behind excuses. Insurance companies are in the same kind of business model, they’re making money by giving back less than they make and by investing their insurance float (basically free capital consisting of money that will be used to pay future claims).
I am not saying that insurance companies are evil and they should not make money. On the contrary! I’m a big believer of Capitalism and of the fact that making money is necessary and a great thing for a business.
What bugs me is the fact that at least, casinos are selling a service: entertainment. If you’re “lucky” you’ll get a money reward, if you’re not at least you had a great time and maybe a few “free” drinks. Insurance companies are showing off giant buildings, huge sports event sponsors, etc. but very poor service in between your subscription and the moment you file a claim, and when you file this claim, it’s usually a nightmare to get your money. It feels like they’re just using their customers’ money to grow their business without providing more value for the end-user. They’re accumulating wealth without really improving their business. This can’t be sustainable in the long run. Could you imagine Airbnb or Uber accumulating wealth without trying to improve and expand their service? Of course insurance companies are expanding their operations, they’re selling new insurance products but they do not truly improve the user experience and their existing services. They’re just finance people trying to sell services.
As I already said, the big issue with an insurance company is that you receive no service before something bad happens in your life. You’d tell me that you’re buying peace of mind but is that truly what you think when you buy an insurance? Or is that truly what you’d expect from an insurance company? This kind of service leads to customer distaste, to fraud, and to indifference. You give money to a company, money that will be used to pay for others claims and maybe, with a very low propability, to pay you back in the future. Not something to be crazy about. On top of that, the insurance company makes a lot of money by investing your own money and you will never see a dime of this money (ok yes maybe they’ll decrease a little bit your premium…maybe). Insurance companies should be more than a giant bank redistributing money.
I believe there are many things wrong with the current insurance model.