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It’s the Principle of it!

June 8, 2009
Chris Garlasco, Owner & Managing Partner - Founders Insurance Group

Chris Garlasco, Owner & Managing Partner - Founders Insurance Group

I must admit that I have thought about this blog entry for a very long time. How do I explain why government run insurance programs almost always fail without sounding partisan or bias? While I agonized over the complexities of this emotional issue, the answer is so basic that I overlooked it in its simplicity. It comes down to principles, the very principle of insurance. In laymen’s terms, it’s the spread of risk over a large group of people or businesses. It is the pooling of everyone’s money in order to cover the losses of a few. By creating that pool, everyone’s financial exposure is greatly reduced.

The creation of that risk pool and how it is administered relies on certain principles in order to work properly. I define working properly as self sustaining. These principles are simply actuarial numbers. They are not emotional. They are not preferential to one political party or another. They simply are numbers.

Insurance companies have people that have dedicated their lives to the understanding of those numbers. Proper risk selection and pricing are vital in order to maintain those principles. Competition in the marketplace is what keeps those numbers from getting out of control. Competition is serves as the “checks and balances” of the system.

The government recognizes the importance of adhering to these principles and applies regulation in order to protect the industry and the consumer. However, in almost all instances, when the government has stopped “refereeing” and becomes a “player” those principles have gone out the window. Since the principles of managing risk numbers doesn’t change regardless of who is administering them, lack of adherence becomes a significant problem. Government run Medicare insurance, wind insurance (Hurricane), and flood have significant funding and coverage problems. Political popularity and actuarial
numbers will almost always be at odds with each other. History, not opinion, tells us that the end result is costs that are out of control and/or coverage that falls well short of the private sector. Simply ask your doctor if Medicare pays him or her enough to stay in business or offer the patient coverage without a private sector Medicare supplement. The insurance industry has decades of highly educated actuarial people and data. The government has populist opinions and very little or no actuarial knowledge. Check it out.

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