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If Obamacare Were Auto Insurance – Explaining the Failures in More Familiar Terms

Most of us work with our Auto Insurance Agent and while Auto Insurance can be confusing, most people would agree that it is far less daunting to understand then Health Insurance. As a licensed Independent Property and Casualty Agent and President and owner of an Insurance Agency, explaining the complexities of Auto Insurance to clients is something I do regularly. Explaining deductibles, premiums, discounts, coverages and what it all means is not that hard with Auto Insurance.

But when we try to understand Health Insurance, it is quite a different thing altogether. The fact is, most people have Health Insurance through work and while some get a number of choices, most of the time almost everything is already set in stone and you simply choose between 2 or 3 plans – if you are lucky.

Of course that is all changing with Obamacare. What was once an employer’s way of attracting and keeping good employees is now a mandatory cost. That will teach employers to try to be nice, I guess.

This article will try to explain what is going on with Obamacare in terms of Auto Insurance, putting it in a more familiar arena for most.

First, most people have a great misunderstanding of how insurance works. The common assumption is that it works just like any business. Walmart, for example, buys a large supply of an item at low wholesale prices – even lower because of the large quantities they buy – and they sell it at retail, often lower than their competitors. And after the overhead they make a profit.

That is not how insurance works.

Insurance companies make little, and often less than zero, directly from the premium you pay. Most assume that it works just like Walmart. You buy a policy and the insurance company charges you a huge amount and from that premium money they pay claims and make a profit.

You might be surprised to find out that often insurance companies pay out more in claims than they take in in premiums. And they still make a profit!

But how can that be?

It is simple really. And rather brilliant. They use “float” which is a simple way of saying that the money they take in from you today will eventually be used to pay claims, but not for a while.

Let’s say I start a business transporting cash from one place to another. You hire me to deliver $1 million cash across the country and I agree to do so within 30 days.

So how much do I charge to cover my expenses and make a profit?

Let’s say I buy a cheap round trip ticket from Washington DC to Los Angeles for $300. And I pay another $100 for  a rental car, parking, meals and incidentals.

My expenses will be $400. And let’s say I need to make $600 profit. Expenses plus profit would be $1,000. $600 sounds like a reasonable profit for one day’s work – sitting on an airplane.

So how much do I charge to transport your $1 million? $1,001,000.00 right?

Wrong!

If I were an insurance company I could actually charge you zero. Less than zero. I could transport your million and give you back over $2,000 in change.

Is that magic? Well, no. During that 30 day period I have to deliver your money, if I invest it at 4% interest compounded monthly I will make $3,333.33 in interest.

So I could either make almost $3,000 for a day’s work if I delivered your money for free in 30 days. If I could do that every day I would make a profit of about $780,000 per year and you get the cash delivered for free.

That is how float works. I use your money for a short time and make money doing it. You get the service you need at a very reasonable cost ($0) and I make an obscene profit.

Instead of a million, insurance companies deal in hundreds of billions of dollars.

So insurance companies don’t make their profit by over charging customers and refusing to pay claims. They don’t need to do either.

So making insurance companies the bad guy in health care costs is simply dishonest.

Now imagine the same scenario with the single payer system the liberals want to force on this country. (Obamacare is the first step – intending to destroy insurance companies.)

Harry Reid said:

“What we’ve done with Obamacare is have a step in the right direction, but we’re far from having something that’s going to work forever,” Reid said.

When then asked by panelist Steve Sebelius whether he meant ultimately the country would have to have a health care system that abandoned insurance as the means of accessing it, Reid said: “Yes, yes. Absolutely, yes.”

The government does not and will never make a profit. They spend money and are very good at that. In the same scenario as our million dollar a day money transport deal, the government will need to charge you for 100% of the actual expanses plus the added inefficiencies of government. And consider the effect of the money that will no longer be invested will have on the economy! And the government would probably deliver the money late.

So now that you know that insurance is a wonderfully crafted invention that does what it does almost by magic, let’s look at the comparison between Auto Policies and Obamacare.

Now obviously if you don’t get sick or have an accident in your car that is good for the insurance company. They will make money on you. But if you are sick or crash your car often, the insurance company will lose money on you. Bummer for them, but that is OK.

Insurance works on the Law of Large Numbers theory. If you are not an expert in math, all you need to know is that the larger the sample the more predictable the results will be.

Take flipping a coin. If you flip a coin 10 times, more than likely you will see more of one result than the other. But if you flip that coin a million times, the results will be extremely close to even. Half heads, half tails.

Insurance companies use a specific set of rules to calculate how much they will have to pay out. If you look at 10 drivers there is no way to come up with a price that you can be sure will cover everything. But if that sample of drivers was 1 million, then the Law of Large Numbers kicks in. Statistics on accidents and payouts are scary close. So they can set their rates for 1 million customers knowing almost exactly how much they will pay out.

And with Auto Insurance or Health Insurance there are some ways that they can fine tune the numbers even more to increase the accuracy of their predicted claims payouts.

First and foremost they define the maximum payouts. This is not done to avoid paying for really sick people, or for very bad drivers accidents. It is simply a way to predict costs so they know what to charge. In the Auto Insurance world there are certain minimum coverage amounts that you are required to have. In Virginia, the state minimums are often referred to as 25/50/20. These numbers are actually in thousands of dollars and the first two numbers are the amount the insurance will pay for someone you injure. If you run a stop light and cause an accident, your insurance will pay up to $25,000 for a single person and up to $50,000 if there are more than one person is injured. And that is it. And the final figure is $20,000 which is how much your policy will pay for damage to property. This may be the person’s car you hit or even a building if you ran through a store front. So if you ran a stop sign and hit a bus full of people and it rolled into a BMW dealer’s lot and crushed 25 BMW’s as well as hurting a few dozen people, your policy would pay $50,000 for everyone’s injuries and $20,000 to pay for the BMW’s.

That’s $70,000.00 in all. And that won’t even come close to the damages. Legally, you are responsible for the rest.

If you rent, have nothing much of value except your wrecked car, there’s not much that you can do to repay the damages – which might total in the millions.

(But you can buy higher coverage limits – and if you own a home or other assets, you darn sure better because they will come after those assets.)

But without those policy limits it is impossible to predict costs. And it is impossible to know what to charge policy holders. It is like flipping a coin that can have unlimited sides. If you know the maximum possibilities – two heads to a coin, $70,000 on a minimum auto policy – you can reasonably predict costs and what you must charge to cover claims and make money.

One of the unpopular aspects of health insurance Obamacare preyed on is policy maximums. When you reach a certain amount, the policy stops paying. A catastrophic injury or serious disease can hit that maximum. And people blame the insurance companies, but if they know the rules of the “game” they can predict costs and properly charge the customers. Without a maximum payout cap it is impossible to predict costs. The Law of Large Numbers will not work because you are not comparing a large group of similar items. It may be unpopular, but you can always pay more and buy more insurance, as you can with auto.

Preexisting conditions are another hated and evil condition of health insurance that Obamacare preyed on. But this is the equivalent in the auto insurance industry of waiting until you wreck your car to buy insurance. The Obamacare supporters like saying that Obamacare gets rid of preexisting condition exclusions and that is very popular. It would be equally popular if auto insurance would allow you to wait until a crash to buy insurance. That would really be popular! But it is not fair to those who have had insurance all along. They would have to pay more for their insurance if you were allowed to cover your wrecked car and the injuries and damages you caused to make up for your decision to not have coverage. This also serves to encourage people to get and keep insurance. Just before a hurricane or bad weather hits an area most insurance companies will not allow people to add vehicles or start policies that include collision and comprehensive coverage – the parts that pay for storm damage to your vehicle. I can expect to have more than one potential new customer cuss me out because I can’t write coverage before a big weather event. But most of these people that didn’t have insurance before the storm would cancel the coverage after the storm passes and any the ones that were responsible and had coverage all along would be stuck with the bill.

And the preexisting condition exclusion with Obamacare leave the rest of us paying the bills.

And insurance works best when you don’t have to use it.

One of the most common questions I get is “why is my insurance so high? I haven’t had an accident in over a year!”

Well, let’s just forget for a moment that the people that most often say this are those that pay $100 a month or less for insurance and that last accident they had cost the insurance company $70,000. If they pay around $1,000 a year it doesn’t take a math whiz to know that the insurance company will never recoup their costs from this person. I know some people feel like they should get their money back if they don’t have an accident all year, but the point is having the insurance when you need it. “Cashing in” means everyone pays. Insurance is not designed to be something you pay for and get your money back.

Obamacare supporters love to play up the fact that people love the “free” stuff. Exams, birth control, abortion drugs, check-ups, etc.

Well, people would love it if their auto policy would give them free oil changes, free car washes and free tires. But all of that has to be paid for. And it might be popular, but it is not free. And it is not insurance. It is an enticement to make you like something that otherwise you would hate.

I hear a lot of people say that auto insurance has mandates. And I am a hypocrite for ignoring the fact that if you are required to buy insurance for your car, you should be required to buy health insurance. But we are not required to buy auto insurance. If we were, I know a lot of folks that do not drive (say in New York) that use public transportation. If they were required to buy an auto policy like we are all required to buy health insurance they would not be happy. And it would not be fair. Sure, it would subsidize the costs for all of us, but for what?

So we are now forcing young, healthy people to buy insurance – not just what they will likely need – but college students are now being required to pay for the preexisting conditions and the mammograms and other “free” exams and drugs mandated by Obamacare. These people can barely afford books, much less paying for birth control for Sandra Fluke.

Obamacare has destroyed the best medical care in the world and has not done one thing to make insurance cheaper nor the medical care itself. It has added coverages and “free” stuff that most don’t want or need.

And while the Obama Administration is looking towards the “bad seed” insurers for cancelling health policies, the truth is, Obamacare has required the insurers to cancel the policies.

Policies that do not meet the Obamacare standards for free stuff are no longer allowed and the companies have no option but to cancel them. This is not on the insurers. It is required by every state.

Before a policy can be sold in a state it must be submitted and approved by the state insurance bureau or whatever government entity controls insurance in the state. They can’t just simply add free birth control. It is not that simple. They must submit their proposed policies and every detail. These are then examined and either approved or not by the state. And only then can they sell the policy.

And now with the thousands of pages of new regulations of Obamacare, not only must the state ensure the policy meets the requirements of the state, but also the mandates of Obamacare.

This year the cancel notices went out to individuals as businesses have a year’s exemption. It is no coincidence that the individuals and small businesses that are having their policies canceled did not get an exemption – or maybe they did – we are still not sure with Obama’s waffling – because these folks don’t have the money to hire lobbyists like unions and big businesses. so they get the shaft as usual.

And I thought the purpose of Obamacare was to cover the poor, unfortunate little people. Tell that to those desperately seeking something they can afford.

 

 

About Tom White

Tom is a US Navy Veteran, owns an Insurance Agency and is currently an IT Manager for a Virginia Distributor. He has been published in American Thinker, currently writes for the Richmond Examiner as well as Virginia Right! Blog.

Tom lives in Hanover County, Va and is involved in politics at every level and is a Recovering Republican who has finally had enough of the War on Conservatives in progress with the Leadership of the GOP on a National Level.

20 Responses to “If Obamacare Were Auto Insurance – Explaining the Failures in More Familiar Terms”

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Tom White Says:

Nothing is more conservative than a republican wanting to get their majority back. And nothing is more liberal than a republican WITH a majority.

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