What is insurance anyway?

By | August 2, 2012

A friend involved in the crop insurance industry recently wrote to me taking issue with a reference I had made proposed shallow loss “insurance” (my words) program in the farm bill currently pending before Congress. My friend pointed out that the proposed shallow loss program was not really insurance at all. It will, in most versions under consideration, charge no actual premiums to farmers, have only minimal underwriting standards, and be administered entirely by the government rather than the private companies. The program will also be included in a title of the bill distinct from those that deal with crop insurance. As such, my friend makes a very strong point that I concede. Shallow loss isn’t insurance. But then, what is insurance?

But a lot of other things aren’t either, then. Medicaid is commonly referred to as “insurance,” but, like shallow loss, it’s a government program that (usually) doesn’t have premiums although it relies heavily on private delivery of benefits. Likewise, Social Security’s core program is officially called “Old Age, Survivors, and Disability Insurance” but, like shallow loss, it’s a fully governmental program with no private components. (It does charge “premiums” of a sort in the form of payroll taxes.) Even flood insurance, which has, for years been “insolvent” if judged by the standards of private companies and, historically, has had no real underwriting standards, might be considered a form of disaster relief rather than true insurance. The same goes for the Price-Anderson Act’s nuclear power insurance and, indeed, much of the existing crop insurance program.

Going further, ERISA health insurance plans often don’t perform any risk management or underwriting functions but are really just funnels (usually with a network of providers attached) for employers to pay for and manage employee healthcare. I’m hardly the first to remark that they—and many other health plans—are more of health benefits management frameworks than “insurance” as such. A lot of other insurance products—extended warrantees, dental and vision insurance—charge premiums that are a very large percentage of the maximum benefits and, as such, might really be considered a way of pre-paying for services rather than true methods of indemnifying people.

I could go on and on in this vein. It’s possible to count a lot of risk-transfer products out of the insurance world if one really wants to and, by dictionary definitions, one is right to do so. Some of these products (like vision coverage) are bad investments for many consumers and others (like health insurance) provides near-universal needs. But anything that transfers risk from one party to another can take on the form of insurance. And, for purposes of public policy debates, that should be enough to discuss it in the same breath.

About Eli Lehrer

Eli Lehrer is president of R Street Institute, a national think tank that supports free markets, effective government and responsible environmental stewardship. More from Eli Lehrer

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