Why Do We Still Buy Insurance When Companies Make Money Off It?
It’s a question often pondered: if statistically speaking insurance companies profit from everyone’s premiums, then why do people continue to purchase insurance? This is akin to wondering why someone would buy a burger from Burger King when the company is set to make a profit from them. After all, every business aims to earn revenue, be it a for-profit company or a nonprofit organization. But let’s delve deeper into why people opt for insurance despite the inherent profit margin for insurance companies.
Why Do People Buy Insurance?
In reality, the purchase of insurance is driven by the need to safeguard individuals and their loved ones from catastrophic events that could result in significant financial distress. These events can range from natural disasters to medical emergencies. Owning insurance doesn’t simply mean you are contributing to the company’s profits; it means you are protecting yourself from becoming financially devastated should something unforeseen happen.
Consider a real-world example: Jon has a chemical factory, which is his primary source of income. If the factory were to catch fire due to unforeseen circumstances, it could lead to significant financial losses. Insurance is a critical investment in such a scenario, ensuring that if something unforeseen occurs, the financial burden is shared, rather than falling solely on the individual or business.
The Need for Financial Protection
Health insurance, when effectively structured, serves as a powerful tool to mitigate financial risks. In most cases, it requires individuals to pay a modest premium to cover a rare but potentially devastating risk that could have dire financial consequences if not insured. However, health insurance often fails to meet these criteria because it covers everything, making it hard to achieve affordability due to a lack of usage controls.
The unpredictability of healthcare claims is a significant issue. Healthcare providers have a financial incentive to increase usage and costs, making claims more frequent and expensive. The definition of risk in healthcare is not clearly delineated, further complicating the situation. Medical events, unlike a clearly defined event like a fire, can be unforeseeable and even the addition of a new condition to the accepted list of disorders can blur this line.
The Role of Insurance Companies
Insurance companies play a crucial role in reducing overall risk, but policymakers often restrict their ability to use pricing to influence behavior. For example, if a person engages in reckless behavior while driving, their auto, disability, and life insurance premiums can adjust accordingly. However, health insurance premiums often remain unchanged, despite the predictability of health events. This is because policymakers often rely on the misconception that health events happen randomly, leading to a lack of individual risk assessment.
Redesigning Health Insurance Laws
Although health insurance is essential for protecting us from financial catastrophe, we need to scrutinize and reform outdated and misguided health insurance laws. The current system often fails to account for the true nature of health risks and their financial implications. By introducing more flexible and data-driven policies, we can better align insurance practices with the needs of individuals and society.
Insurance is not just about profit; it is about safeguarding lives and ensuring financial stability. Despite the profit margin that companies like insurance providers maintain, the value of insurance in protecting against catastrophic events cannot be understated. Understanding these dynamics and advocating for reform can help create a more effective and fair healthcare insurance system.