The insurance company agreed that she was covered. So they paid her and then dropped her. No big deal, right? Wrong. Once you've made a claim or two against your insurance, it can be very hard to get any new insurance company to cover you. She finally did find a new insurer, but the price has gone way up -- negating her original claims.
Did you know every claim you make goes into a CLUE report? It's like a credit report, but few people know about it. Once you make "too many claims" - even if they're legit and beyond your control, you become an insurance pariah.
Because of this, I avoid making any claims unless absolutely required.
Insurance paid up then dropped me. Second insurance doubled the premium stating I'm a high risk. I was like WTF? This was a design defect that has been fixed. It's not like I'm a slob and let the house fall apart. It's a relatively new house.
What's even dumber is the 'claim' followed me to two more houses over the next eight years. WHY? It's not like I have a magic wand and caused the pipes to bend and cause another back flow. I argued with the current insurance company as high as I could until they agreed to reduce the premium to a level I'm comfortable with.
It sucks.
Things go off the rails though for customers perceived as high risk. Grouping all these folks together means a higher rate, possibly quite a bit higher.
The use of prior claim history as a risk measurement seems like a very cheap way to do underwriting. This feeds into being able to offer the cheapest offering... no need for experienced and qualified underwriters... which means a cheaper product.
The original goal of insurance, shared risked, has been somewhat eroded by this.
Sure, most industries benefit from a bit of regulation, but from that to "justice" is a long road.
Also, I have been told that it might be illegal to claim that you are uninsured, pay the bill and then get reimbursed by your insurance company to avoid surcharges... not sure if that is true.
Health insurance is actually very different[0]. The flow of money with medical billing is really, really complicated, which is why we end up with a system that's so confusing that even most physicians and clinicians don't really understand it.
Hospitals are generally not legally allowed to have higher rates for insured patients; this is actually why the sticker price for uninsured patients is so high. Hospitals use those high prices as a starting point to negotiate lower prices with insurers. (As an uninsured patient, you can almost always get the hospital to knock off 90% of a large bill for this reason; they really don't care what you pay, and they'd rather negotiate a smaller bill with you than have you default).
I could go on a long rant about the indirection of the medical billing system and all the problems it leads to, but I'll save that for another time.
> Also, I have been told that it might be illegal to claim that you are uninsured, pay the bill and then get reimbursed by your insurance company to avoid surcharges... not sure if that is true.
Yes, this is fraud. (It also happens to be a pretty bad example of fraud, since it's probably going to end up costing you more money, but it's still fraud).
[0] Strictly speaking, health insurance isn't really 'insurance', even though we talk about it and price it like it is, because one of the primary functions has nothing to do with smoothing risk.
You're forced to mention any car accident you've had to your insurers, even if you didn't claim for it. (At least, this is true in UK, not sure about US.)
My wife had to have an intensive surgery a few years ago. The total bill amounted to over $100,000. Insurance negotiated it down to $25,000 or so, and then paid 90% of the balance. That's pretty typical of my experience.
I see no reason that you couldn't tell the doctors that you are uninsured, negotiate it down on your own, pay the bill, and then submit it to insurance for reimbursement.
> That's why the prices are so high to start with.
I feel like health insurance prices are too high by a factor noticeably larger than 2 though.
Unfortunately, just like for many things, government makes it mandatory to buy insurance for many of your properties. So the scam can go on and on forever.
Mortgage lenders make homeowner's insurance a condition of the loan to protect their assets. I've never heard of a state requirement for homeowner's insurance.
I'm in the US, though. Might be different elsewhere.
This is codified in law by parliament as the Tenements (Scotland) Act 2004, Section 18, Obligation of owner to insure - http://www.legislation.gov.uk/asp/2004/11/section/18
[1] - https://www.fanniemae.com/content/guide/selling/b7/3/02.html
Granted, almost no one will originate a subprime loan these days, because everyone in the private-label MBS business got out or was bailed out, so the best this example shows is a de facto standard set by the guarantor of last resort.
This is economically efficient behavior - and in fact you should set your deductible to the highest amount you can afford out-of-pocket, as insurance is really only efficient for amounts above that. You should be aiming towards insuring catastrophic loss - eg, a fire that burns your whole house down.
You self insure when you can afford the max cost you could incur (e.g. You could buy a new car if you had to.) You buy insurance when you can't afford the rare but very costly catastrophic loss - life insurance, health insurance, car injury insurance.
Fuck it. Who can we trust with anything nowadays?
They even provide legal support for incidents outside home. I had a bike crash, and they took all the required paperwork and settled with the other part without me paying a dime.
Good question. After working in insurance and finance for about 15 years, not those two sectors for sure.
This is a pretty extreme case of a household hazmat issue. 99/100 times, the pragmatic answer is to maintain deniability, make it as safe as possible and get out if necessary.
Seriously? Pragmatic, yes. But am I reading you correctly? It sounds like your suggestion is to simply sell the house to someone without telling them about the mercury, exposing them to danger, and then prepare to lie about knowing it was there if they do discover it (hopefully not the hard way) and come after you.
I mean, nice to make it "as safe as possible," I guess, but you still seem prepared to expose people to conditions that are, nonetheless, totally unsafe in order to get out of paying to fix the problem. (Not to mention the fact that now they have to pay to fix the problem.)
[1] The median wage in the US per person is $26,695.
Of course, its important to distinguish this situation from cases where the insurer did agree to cover it, but refuses to pay anyway.
They are scum because they happily collect their premium, and actively undercut the costs of the policies to maintain profitability in the short term. They also screw with people for claims they owe. In a case I'm aware of near my home, the insurance company low balled a fire claim by 30% for quick settlement, forcing the homeowner to roll the dice in arbitration.
For the most part they're just yet another guy who takes a cut whenever a house is sold.
This is one of the cases where you're screwed and need to remediate. Typical household hazmat issues are stuff like lead paint, asbestos, etc. All of which can be stabilized (for example, you can encapsulate lead paint and personally dispose of asbestos in municipal trash) without shelling out money you don't have on remediation services that are often ineffective, and also make it clear that you were aware of the issue.
In this case for example, every neighbor saw the clean harbors guys in spacesuits at his house. When he sells the house a decade from now and the new owner finding more Mercury somewhere, the old lady across the street will tell the new owners, and this person may be sued, even though he nearly bankrupted himself on cleanup. So whenever you can maintain ignorance, you should.
Lastly, always investigate how hard it will be to get insurance on a property you are considering buying. Water and/or mold damage claims typically remain against a property in the CLUE indefinitely.
This isn't a scam at all. That's exactly what you'd expect from insurance. Insurance isn't there to save you money. In fact, the expected value of an insurance plan is always going to be negative on an infinite time horizon[0].
The whole point of an insurance plan is to smooth risk: instead of the small possibility of a catastrophic failure, you take the relative certainty of having a fixed monthly payment (your premium). At a very high level, it's sort of similar to taking on consumer debt (credit card debt): in the long run, you'll always pay more than if you just paid cash up-front, because of the interest. The difference between credit cards and insurance is that you don't know when the expensive event is going to happen, so you agree to always pay the monthly payment regardless of what happens. And while banks charge interest based on the risk that you won't pay back and the opportunity cost of that money, insurers charge you a premium in exchange for the luxury of not having to guess whether next month will have an expensive event or not.
In your friend's case, the fact that she had two claims adjusted her relative risk profile, which means that her premium had to adjust accordingly.
[0] If it weren't, there'd be no point to going into business as an insurer, because you'd be guaranteed to make an operating loss. The only way you'd be able to make any money is based on the investments that you make, at which point you might as well eliminate the insurance side of your business and operate as a bank. (Interestingly, this is why the relationships between banks and insurers are so close in many countries, and also why most insurance markets - car insurance and health insurance[1] being two notable exceptions - have surprisingly slim profit margins).
[1] Health insurance is a special case because, strictly speaking, it's not really "insurance", but that's a whole separate discussion.
I'm curious how this math works. In my (quite likely incomplete) mental model of insurance, there are only a few terms: premiums, payouts, profits. It would seem that they have to balance. So if you pool risk, you are summing the payouts. Those payouts are covered by the sum of premiums. Any profit is the sum of premiums minus the sum of payouts.
Profits = Premiums - Payouts
Is this right so far?
Because then it seems that the expected value of insurance to the customer is the negated value of the expected profit of the insurer. Put another way: if the expected value of insurance is not negative, shouldn't the insurer raise premiums or exit the business?
Again, I know next to nothing about insurance and I'm asking to learn.
The point of insurance is to smooth risk, not to pool it. Pooling risk is not the point of insurance as a product; it's the mechanism by which that product (risk smoothing) becomes feasible as a business model.
> Look up the term "actuarially fair".
There's really no need to condescend by telling me to look up basic terminology; I am quite well-versed in this topic.
I didn't bring up moral hazard in this post, because it actually isn't necessary to explain why insurance has a negative expected value (which is equivalent to the statement that premiums are always non-zero[0]). It sounds like you're confusing a few different concepts here.
[0] Moral hazard is generally addressed by deductibles, not by premiums.
On an infinite timescale it may not add up but it surely can on any practical one, right?
from an individual perspective, insurance means you don't have to worry about unexpected expenses from things beyond your control (ie, peace of mind).
Now, the mechanism by which this is achieved may be described as a pool in that it's a single company with a pool of money that everyone pays into and the input into that pool necessarily must be greater than the output.
But from the "customers" perspective, insurance is peace of mind. ie, it smooths their total risk over time.
You will always have to worry about unexpected expenses, because insurance companies are never going to insure everything that could possibly happen, even if you get a good policy that doesn't dick you around on claims.
If you are expecting insurance to protect you from not knowing the risks, then you are taking a much bigger risk than not having insurance at all, because of the complacency that the belief you're insured engenders.
What I'm looking for is the ELI5 for what insurance really is about (especially from the POV of insurers) given that, if I understand correctly, 'chimeracoder is disputing the insurance-as-everyone-pooling-money model.
people and business purchase insurance to cover unexpected loss, ie, "peace of mind".
Maybe insurance companies are evil scumbags, but that's STILL the reason why people PURCHASE insurance.
But everyone seems to forget that there's a huge part of that pool taken by the things sitting in the insurance office's chairs.
And no, I'm not kidding.
There is a broad market in specialist insurance which caters to the non-volume cases. It just costs more because you have to expend more effort-per-sale (and of course because non-volume also tends to mean that the risks genuinely are higher - e.g. homeowners with prior subsidence claims).
Of course if no one else is looking why give up the easy money - after all it is not like the customer can buy a new policy without the massive markup. Collusion does not need to be explicit, it can be accomplished just through everyone using the same systems and rules.
Competition only works if at least one of the parties involved is trying to compete. If all the insurance companies are happy to slap on a blanket risk premium then there is no competition. This is great if you want to disrupt the status quo.
For car insurance it makes sense, as the risk is specific to the driver, so the number of claims tells you something about the insured's driving.
But, for home insurance, isn't it mainly about the property rather than the individual? And isn't that mostly about location and property type?
Will this continue to affect her premiums if she moves? Will it also affect the new owner of her home, even though they weren't party to the previous claims?
Not necessarily. One of my friends had his parked car hit by a drunk driver while he was not in it. His insurance premiums still went up after claiming for the damage.
- Not park their car in a garage overnight, exposing them to various damage to the car.
- Not park their car in a garage when they go downtown.
- Park their car near bars or other places statistically more likely to have drunk drivers around.
I'm not saying your friend did any of that and that it wasn't a complete freak accident, but on the scale of everyone that's being insured there's surely correlations like that that justify the premiums going up.
- not buy a house that's next door to a homeowner who rents the home to a person who is willing to drink and drive.
In case you didn't pick up on it, I'm calling your bullet points bullshit.
It's kind of like arguing over code, there's always going to be something you can nitpick as not optimal. There will always be something a person could possibly have done to prevent the issue (like committing suicide that morning), but it's a question of what's reasonable, and it is not unreasonable to expect a vehicle parked correctly in a parking spot to not be hit by another vehicle.
We're talking about insurance. There's certain reasonable activity that exposes you to heightened risk. Your car is at higher risk parked outside than in a garage.
Who should assume the cost of that heightened risk? Should the insurance company charge a person with a garage and a person without one the same premiums? Should there be no consequences for damage that could have been avoided by storing your car in a garage?
If the answer to those questions is "yes" you've created a moral hazard. Why would anyone store their car in a safer location if their insurance company will pay for any damages without their premiums going up?
To categorically say that this shouldn't be priced into insurance is to say that some buyers of insurance with higher risk profiles should be subsidized by those with lower risk profiles.
Now of course insurance companies are far from perfect. They have limited data to work with and it wouldn't be cost effective to figure out whether some individual customer had a one-off freak accident or not.
But over their entire customer base it's not an unreasonable approximation to connect your premiums to traffic incidents you were involved in, even though you were not at fault.
Not being at fault is not the same thing as not having exposed yourself to heightened risk. The police deals with the former, insurance companies deal with the latter.
By moving in next door to a drunk, how dare you.
The problem with your example, and the reason it doesn't apply to this particular discussion, is the rates will go up if a drunk drives into your garage door and hits your vehicle.
Is it because of a heightened risk, or is it because the insurance company removes you from their special "never had to pay anything out on you" list?
someone who gets a DUI is at an increased risk for wrecks, this is reasonable. Someone who is parked in a parking spot is not, that is not reasonable. The driver is already paying a rate based upon where they live, they have ALREADY paid for that risk.
What the heck? Can you elaborate on this? How is this even legal?
No, because you're paying for the peace of mind that comes with knowing that your worst-case scenario has been mitigated, on the off-chance it happens. Even if there is no disaster, you still benefited from not having to worry about it as much (knowing that the insurer would cover some portion of it).
Let's play a game: you're allowed to flip a coin ten times, and I will pay you $1 for each time it comes up heads[0]. Your expected value is $5, but you could make as much as $10 or as little as $0.
Someone else comes up to you and offers to pay you a guaranteed minimum of $2 at the end of the game. In exchange, you have to pay him $.25 every time you flip the coin, regardless of whether it comes up heads or tails.
In expectation, you're going to come out behind, but this game tightens the variance on your outcome. The worst case is that you lose $.50 (you pay the insurer ten quarters, flip ten tails, and receive $2 from the insurer). The best case is that you receive $7.50 (you pay the insurer ten quarters, flip ten heads, and receive $10 from me). The expected outcome is lower, but the range of possible outcomes is $8, not $10.
In the real world, you're insuring against money being taken from you, but mathematically it's the same, and I find it's easier to explain it this way. Most people have a more intuitive sense of earning money than losing it. Go figure - psychology is weird.
[0] One notable difference here is that the distribution of coin flips is approximately normal (binomial), whereas most insured events have a very long tail, with a mode of 0.
Now of course if they charge too high, then you could go to a competitor. But there is this CLUE database (I just learned about in a sibling comment here) which apparently is shared among insurers and depending on what is there (or what is not there! -- such as, it was really just an accident) you get labeled and dropped. So even a competitor might decide it is safe to stay away from you.
The irony is that the peace of mind I end up with when dealing with insurance companies of any sort is the dead certainty that they are going to screw me over just as hard as they possibly can, should I ever actually need the service they pretend to be in the business of selling, so I'd better give them as little as I can legally get away with and expect to handle the unlikely disaster on my own.
They don't expect profit from all their accounts, not a priori. However they choose to do business only with those account which they believe will be profitable. If They expect to loose money from an account, they'll choose not to do business with you.
We can debate if this is moral or not (some religions state it's not, i.e. the Amish as it is a form of gambling and discourages charity) but that's the game.
The purpose is clearly to discourage you from making a claim, which is what makes insurance a legal scam.
Which is why I'm skeptical of the AMA requirements to cover certain recurrent health services (annual checkups, contraception). If they're unavoidable than its not insurance!
Also, most health insurance plans have always covered checkups, contraception etc. The ACA specifies that these should be covered without copayments and deductibles. This is intended to be an incentive for the insured to get these kinds of preventative procedures instead of waiting till more costly problems develop. This tends to reduce the total cost of care to be reimbursed and (in theory) should lower premiums.
Which is an absurd way of thinking about it, but there you are.
If the insurer offers an "even" price to all people regardless of history, then it will lose business to a company that offers "No claims discounts". Therefore all of it's customers would he high risk driving prices up even further.
Essentially unless you are willing to outlaw all risk assessment and premium scaling you cannot prevent exactly what you describe. Note that the EU did this with regards to gender discrimination on car insurance premiums (insurers have simply found proxy variables which correlate highly to gender).
My house insurance company recently sent me their updated privacy notice and I'll have to reread it. I don't remember them saying they would share my claim history with third parties.
My insurance doubled. This was a €900 bill though, so doing the maths, that's 9 years worth of no-claim discount (as in, I'd have to drive accident-free for 9 years with the same policy before I would earn the not-claiming-insurance back).
Of course, that's based on a motorcycle insurance, which is half as expensive as a car insurance; if I get a car insurance later, that discount (or lack thereof) will persist.
TL;DR: I have no problems with insurances becoming more expensive for people that make or get claims for things that were their fault.
It's great.
It's almost like the insurance industry is large, wealthy, and politically well-connected enough to capture regulatory bodies in order to insure the existence of markets for its produc... wait a second...
That's not what they do, though. They are in business to make money, yes -- but they don't always. A bad hurricane season and they can (and do) lose billions.
http://www.iii.org/sites/default/files/paper_HurricaneAndrew...
Katrina: $47.6 billion paid out. Andrew: $25.0 billion paid out. Ike: $13.1 billion paid out. (Constant 2011 dollars.)
See discussion of "wind pool" in the document, by the way: the way Florida works is by having a semi-governmental organization insure wind damage and letting private insurance companies sell "we'll insure any risk as long as it isn't wind damage" policies.
In theory anyway.
(I do not live in New Zealand).
Take your own risks in life. Don't drive a car you can't afford to replace.
In the "no mandatory insurance" scenario, you're taking the risk that someone else may damage your car. So don't buy a car you can't afford to replace.
FWIW I didn't downvote you. Your post is borne of ignorance of how it works in the US, which is actually enviable because it means your healthcare system isn't an absolute wreck :-)
Definitely not $50k (more like $2.5k), but it's still disturbing that the line between insurance covering it and not covering it was so thin.
I wonder if a more thorough inspection would have caught it. Surely houses built around that time are routinely inspected for asbestos, lead-based paint, etc before purchase anyway. (Actually, going back and reading the comments, he actually addresses this point: http://www.jefftk.com/p/mercury-spill#fb-752340840802_752343.... Perhaps he could have made it a condition of purchase, that the seller pay for a mercury vapor inspection? Perhaps it's not such a common problem that such a requirement would be reasonable. Hindsight, etc.)
To bring this back to topic, I would gladly get on board with any plan to fix "insurance". It really feels like less insurance and more government mandated protection money ; but that seems to be the fundamental problem, that reforming insurance is almost paramount to reforming finance. How do you even begin to make headway against an entity with that much power/influence and tentacles already so deep in these processes?
(edit re: protection money; the gist of it is anger that if you fall on a "responsible/lucky" part of the bell curve, you'll likely end up paying out for FAR more than you ever get back while simultaneously watching the insurance company often do everything in their power to NOT come through when they should. In my case, I would have expected the transportation company's mandatory liability insurance to cover this.)
NPR's Planet Money had a good discussion: http://www.npr.org/sections/money/2014/10/03/353030214/bedbu...
(Actually, hail claims have been going up: http://www.claimsjournal.com/news/national/2014/05/02/248354... )
Of course they can cover. It's a matter of how much you pay for your insurance, and to a large degree how much they company saves up. In the case of a hailstorm it's not because they cannot pay, it's because they don't have proper savings to cover it. A hailstorm with fist size hails is not going to cover the entirety of California, so it's very manageable.
An example, when a fireworks factory in Denmark exploded the total claim of material damage was 750 million DKK (113 million USD). The vast majority was covered by insurance companies, even though that would fall under correlated risks. One of the way insurance companies handle this is to have a joint fund with other insurance companies (I think this is government mandated), where they can withdraw in cases like this.
Also, it's not safe to drive during a massive hailstorm. You should be pulled over anyway.
Car insurance is different from other forms of insurance. The reason car insurance is mandatory is because otherwise, if you hit someone or damage their property with your car and they successfully sue you, they could very well end up with nothing (if you're broke). With insurance, that person is guaranteed to get a payout, because the insurance company is well-capitalized enough to be certain to pay out.
In a world in which everyone drives, this is mathematically equivalent to everyone purchasing insurance against damage that happens to them or their car by someone else. The reason it's not structured this way is because (1) not everyone drives a car, and (2) it creates a moral hazard problem (having car insurance - and the consequences to taking actions which can raise your premiums - serve as a deterrent to bad driving.)
I'm still trying to figure out how the wind pushes over an open trailer with 2 sports cars on it. At least mine was 4 or 5 years old at the time, the other car on there was brand new and had only been driven far enough to get it on and off the trailer.
I'd always, perhaps naively, assumed an "act of god" was simply covered.
That's twisted logic. There was a loss of perhaps somewhat more than $5k all things considered, but you didn't have to replace a $5k blue-book-value car with a $25k car. That $25k may have been a big outlay if you paid cash, but it's not a loss for that amount. So far, you've only lost $25k-(current bluebook value), which is much less than $25k (as long as the car hasn't been damaged) even if the car was new and dropped a thousand or two the moment you bought it.
This, but minus the value of the car you now have.
That doesn't really align incentives, though. There's really no benefit to each individual to approving another person's claim (all it means is less money in the pot).
Claims are rare enough that it's not enough to simply say 'if you vote this way for someone else, we'll apply the policy consistently for you', since the expected number of claims that a person is likely to file over the course of their plan is close to zero.
(And even if it weren't, the whole issue is that insurance has relatively well-written rules for clear-cut cases, but the complaints people have - like this one - are generally about the interpretation of those policies for special cases, since policies can't possibly enumerate every possible outcome.)
In fact, right now I'm getting around on a rental car courtesy of my policy, while my car is being repaired; I'll be out of pocket about $250 total for around $2000 worth of damage to the car (tl;dr -- driving home a few nights back, didn't see a traffic cone that had rolled out into my lane and ran over it at 50mph, which is not good for some of the things on the underside of the car).
I know those numbers aren't right, but lets say that they are. In that case, paying $100/mo for insurance and not making a claim for 10 years there's over $10,000 worth of loose money (more once you factor in interest!) sitting around that's just for me because according to your analysis insurance isn't risk pooling but risk smoothing. So then I make a claim for the whole car, $20k. Fine, half of that comes out of the money I already paid to them for risk smoothing, the other half should come from the future payments I'll make to them for risk smoothing. My rates should double in this case.
But most people don't total their cars every 10 years, many people go their whole lives without ever making a claim. So at the end, they might have paid $50k in self-insurance risk smoothing premiums that the company gets to just keep, that's not right is it? Clearly no.
So what people actually think is supposed to happen is that everyone pays about the same amount and some people get unlucky and make claims and that doesn't get counted against them. They're all wrong, but that's how insurance is sold so it's understandable.
In reality I suspect that the breakdown of float, administration and profit is more like 30%, 30% and 40% which is why premiums can go up so much after you make a claim; you're actually making almost no real contribution towards the float at "regular risk" insurance rates. Of course this also neglects the risk pooling aspect.
("Companies are legally obliged to maximise shareholder value" isn't exactly true, but it's usually what people cite when a business is doing something awful)
Even the 'super everything included' insurance rental companies try to sell wouldn't have covered this, as they exclude items accessible from the passenger compartment (like most small cars, the Smart Fortwo doesn't have a separate boot).
There is little insurance startup compared to fintech but 'insurtech' is a really promising field with old incumbent and a lot of opportunities.
Given the discussion in the comments here of avoiding the cleanup, perhaps something similar to Superfund would be a good idea (there is some clear general benefit to cleaning up the house).
That's the business model for insurance companies. They try to make you think that you're covered when in reality you're not.
On the other hand, it's pretty frustrating in our case!
In all seriousness, cool story, glad you're okay, and this makes me think "insurance" as a business needs to be re-thought entirely. How many times has it happened that insurance companies weasel out of paying? Objectively you might think THAT was their primary job.