The Insurance Paradox

If my health insurance provider were a rational player, it would hire somebody to shoot me when I get injured, to avoid paying for my expensive trips to the hospital.

If my life insurance provider were a rational player, it would pay for me to receive the best health care possible, to make sure I live forever and maximize the premiums paid over my lifetime. If I don’t die, State Farm never has to pay out benefits.

Why isn’t my life insurance provider in charge of my health care? Why isn’t my health insurance provider the one paying benefits when I die?

Legally, neither provider is allowed to do that. From a capitalist perspective, insurance is a terrible industry. It takes cash out of circulation by receiving premiums, and saves the money in an illiquid vault for a rainy day. Unlike banks, insurance companies can’t even loan this cash hoard out to borrowers.

Lloyds of London

It used to be the other way around. Long before Obamacare and socialized insurance risk, wealthy individuals with real estate and property could independently sell insurance. They would meet at Lloyd’s Coffee House to sign the deals. Pay me £x per month, and if your ship sinks, I’ll give you my house. The trade of immovable assets for cash payments created a liquid marketplace, ensuring peace and prosperity for all.

At some point, the insurance underwriters got greedy and sold more insurance policies than they could afford to pay out. Government agencies stepped in, regulating the insurance industry into the anticapitalist behemoth you see today.

So let’s say we deregulate and privatize health insurance. What about the high-risk individuals who cannot afford health insurance, like Elaine?

Elaine will be fine. She would set up a death pool for herself, and open up bets to the public market. Many would bet for her demise, driving up prices. The counterparties betting on Elaine’s survival would then be highly incentivized to keep her sorry ass alive. They would probably pay for my health care.

Now taking bets on an Elaine Ou death pool.

References:
andy kessler

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