My father was wrong. I learned at my father’s knee that it is wise to self insure for the little things and buy insurance for the big things. Thus it is clever and thrifty to buy insurance policies with large deductibles. It is a little odd to notice that poor people should buy more comprehensive, and hence expensive insurance. Large economic actors can afford to self insure more than smaller ones; so for example a Billionaire may minimal car insurance – since if he can casually afford to replace the car – but he will carry a substantial personal liability policy since replace his wealth would be harder. Firms often self insure and some even gin up their own employee health insurance systems.
This advice turns out to be wrong, for most of us. There are three reasons. The simple reason: people buy high deductible policies not because they can afford to cover the cost of small loses, but because they don’t have a clue what they are buying. Secondly the marketing of these things is entirely a pure confusopoly; buyers haven’t got a chance. But the third reasons is interesting.
Insurance has plenty of adverse selection and agency problems. Nominally a benefit of self insuring is that your less like to engage in some risky behaviors since you will personally bear the cost. On the other had you remove any incentive for the insurance company to bring it’s scale advantages to into the equation; e.g. the insurance company is likely to work for systemic improvements that reduce risk.
So there is an argument to be made that my father’s advice might be wrong. I noticed this because I have a few medical bills on next to me. My health insurance includes a deductible. What I notice about these bills is that I am not getting the prices the insurance company negotiated with the providers. I am paying full price! Note that agency is not all bad; since agency creates a locus for skill. In this case I have lost access to both of these. Having taken the choice to self insure for the amount of the deductible I now have the option to simulate the skills of the insurance company – i.e. I can call these providers and attempt to negotiate a discount … or not.
So this is another interesting story about middlemen. There are three actors in this story; the service providers, the insurance company, and the service consumers. I’m am fascinated to notice a new move in the game that can takes place during the negotiation between the insurance company and the providers. In exchange for a reduction in prices the insurance company assures the providers that it will sell more high deductible policies. That’s great for the providers since they can then charge those consumers the list price. To fulfill the promises made during this negotiation the middleman may have to set goals to assure he sells enough of the high deductible policies.
That shapes the market in very perverse ways. The small jobs become the high profit work. My father’s advise become obsolete. How weird is it that purchasing high deductible policies is a form of free riding – since as long as the insurance company price control feedback is working effectively you get the prices and quality provided by that loop without paying for it.
This is all marvelously and distressingly perverse. Since poor and innocent people tend to mistakenly purchase high deductible policies (do to regulatory failure enabling market failure) this process shifts costs onto poor people. I also think this explains why the last car I bought had a bumper design that was prone to failure who’s repair was just bellow the typical deductible. The dealers presumably like that. The usual feedback loop thru the insurance company that would fix it wasn’t just broken – somebody removed it.