Insurance Isn’t Insurance & Why It’s All So Crazy

Insurance Isn’t Insurance & Why It’s All So Crazy

We did this years ago, but it’s time for a refresh for new readers.

You make a bet with a bookie. You don’t want X to happen, where “X” can be anything you don’t like. Perhaps your favorite sports team losing. Or a meteor crashing onto your car. Or having a woman elected governor in your state. Or BLM activists breaking into your business and stealing everything. Whatever.

If X happens, you want to be paid M dollars. Or Euros, or pounds, or yen. Whatever.

If X was your favorite team losing, and your favorite team does indeed lose, then the bookie has to fork over—or chopstick over, if it’s yen—laugh at that—that M.

But if X does not happen (in the time frame you both agree to), you pay the bookie, say, P.

Both the P and M are negotiable. Naturally, you want P low and M high, and the bookie wants the opposite. How are these prices set?

First, it is only fair that your bookie charge you to make this bet. After all, the bookie has to set up some kind of shop to make and track these bets, and all businesses have overhead. And he has to take some profit, because even bookies have to make a living. Call this fee F.

Typically you don’t see this fee, because the bookie adds it into the bet mix. One way to think of it is that the bookie subtracts it from the M he is willing to pay you should X happen, or he adds into the P. This is cutting it too nice for us. We don’t need to get into the exact mechanisms of how the bookie picks his F (or spreads it around). So let’s pretend F is so small as to be negligible.

We still have to look at how the bookie sets P (that you pay when X does not happen). You set the M, the payout you get if X happens. It was you who initiated the bet, so the whole thing begins with M.

Enter probability, which is necessary for both the bookie and you.

What is the chance X happens?

There isn’t one.

I’ll repeat that, since it’s difficult to remember: With one wee small exception, there is no probability for X to happen, or not happen. X has no probability. Nothing has a probability.

Both you and the bookie will base your guess of the chance X happens conditional on certain information both of you think is probative. He may have charts, or whatever, of past Xs; you have your intuition. Whatever. Each of you produce probabilities of X, conditional on those ideas.

The bookie, doing this for a living, will have this down to a science. He’s trying to guess, for you, whether X will happen. Ideally, he’d form a probability of 0 or 1 (i.e. figure out the causes), as the case might be. But if he can’t, he’ll have to settle for the information he thinks is most probative. Whatever that is let’s him set his price P.

We can ignore the math of it, but it should be clear that if the bookie thinks X is very unlikely, P will be small (and he sets his mind to F), and if he thinks X highly likely, P will be high.

The exception is crucial.

Suppose you go to the bookie and say “Pay me M if X happens. By the way, X has already happened.”

The probability of X in this case, the exception, is 1. Because X happened. This probability is obvious, and shared, by you and the bookie. This being so, what should the bookie charge you to make this bet?

     M + F.

After all, you are in no danger of having to fork over P. The bookie must pay you M, since X happened, and he has to make his “vig”, or fee. So, after making the bet and balancing the books, you are down F necessarily.

Betting would be asinine. So you’d never make the bet. Why would you?

So. If we call X a “pre-existing condition”, we are finally at the point of understanding modern health “insurance”, which is and isn’t. Insurance, that is.

What happens is rulers force bookies—which is to say, insurers—to take bets for Xs which already happened, which might be all right if bookies can charge a fair price for these bets (M+F). But they’re not allowed to. They might only be allowed to take F, which (I hope you can see) is a clear loss of M for them. Or they might be allowed less than F. Or even 0.

This being so, they must raise F on other bets, to make up the M (or M+F) on the bets they were forced to take. Costs rises on all bets except those which are sure things!

This makes insurance not insurance, but healthcare itself. A form of outsourced socialized healthcare. Forcing bookies to pay out on pre-existing conditions spreads the healthcare costs around, it’s true, but that makes insurance something other than insurance.

Insurance is you making a bet you hope you don’t win. Socialized healthcare is having somebody else pay for your care at the time it is needed. This is all a simplification, of course, but what we call insurance is largely socialized healthcare, with some exceptions for real insurance, some of which that make sense, others not.

Why doesn’t the government just announce it’s taking over medicine? You know the reasons. Plus outsourcing bookies to manage socialized healthcare might make the process more efficient than the bureaucracy, which has no incentive except to grow. Who knows. And we haven’t even considered the costs themselves, the need, or non-need, of healthcare. The whole thing is a mess.

Courtesy of out Expertocracy.

Note: Health insurance is somewhat like life insurance, yes. But life insurance is part pyramid scheme, where bookies hope to be dead themselves before paying off, and part BIG F, where they hope to collect enough fees from your yearly bets so that they are larger than M. In a declining population, watch the fun of what happens to life insurance.

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  1. William Wallace

    Fortunately most “insurance” has exceptions which block payout for WAR or INSURRECTION. Wonder how they will prefer to obtain population declines.

    In the mean time, enjoy your last smoke.

  2. Incitadus

    Psychologists surprised to learn that the character profiles of bookies and
    insurance salesmen were identical. Subsequent electron microscopic analysis of
    neuronal development revealed sparse stunted dendrite formation in both cohorts.

  3. cdquarles

    Indeed. Far too few folk know that Medicare and Medicaid are just rule makers. Said rules include payment rules. “Private” insurance folk also have to live by rules, though to a greater or lesser extent fiduciary duty and survival curves are a part of those. The “private” insurers do the paper work processing and pay the claims based on the “contract” rules demanded by government. My own experience with these is that the government dominated ones paid worse than the the not-so government dominated ones. VA, either side, was one of the worst.

  4. Forbes

    Insurance is not insurance–certainly in the case of “healthcare” or medical insurance–it’s just the prepayment of lifetime healthcare expenses on an annual fee (premium) basis. Annual premiums are a “smoothing” of expenditures, which typically are lumpy as to the accidents and illnesses that cannot be predetermined, except by population experience.

    I think of the “bookie” model as like the horse track or the point spread in other sports, where the odds or point spread changes so as to keep the money on both sides of the bet equal, less the bookmaker’s vig. You can view the odds regarding payouts as probabilities of outcome occurrence, but it’s merely the collective view of the bettors, who are wholly detached from the event–except in the case of “fixing” outcomes.

    The modern day example of betting markets being wildly wrong was the UK case of Brexit. The big money bets for “stay” were 10x (average size bet 500 vs 50) the small money bets for “leave,” so the odds needed to be massively shifted to draw “leave” bets to even the pool. The money bet made “stay” the “odds-on” favorite. But when voting, big money gets the same vote as small money, so the 10x advantage disappeared, and “leave” won the vote.

  5. Alex

    I suggest checking out the various Christian health shares. work like a coop. In my experience, most freedom available. And I have saved a large sum of $$ since cancelling insurance and joining 2017

  6. spaceranger

    Back in the day I would go to the Dr. , pay for the appointment, then submit the insurance paperwork. The insurance company would reimburse me less a deductible. Thing was, it was a lot cheaper then. Now I go to the doctor and there is at least one, often 2, people there who’s sole job seems to be handling “insurance” claims. Whatever happened to insurance being a shared risk?

  7. Gunther Heinz Hochleitner

    By 2025 GPT-AI will know everything about every possible thing that can go wrong with the human body and how to fix it … for free.

  8. The True Nolan

    @Gunther H H: “By 2025 GPT-AI will know everything about every possible thing that can go wrong with the human body and how to fix it … for free.”

    That will be an extraordinarily valuable development! Of course the free cures will never be implemented, but once AI figures them out, the politicians and healthcare bureaucrats will know exactly what things to outlaw. After all, the scam must go on.

  9. wostenberg

    How did it work prior to 20th century insurance? They also had to do the M+F math. I hear there were voluntary associations, take the Elks lodge for example, that hired a lodge doctor on contract for a year to care for the members. I read it was about a days wages. For a year of care.

  10. Johnno

    Like all pyramid schemes, it’s best to get in early, and cash out quick, leaving somebody else holding the bag.

  11. Tom Welsh

    For my money, Ambrose Bierce said the last word about insurance in “The Devil’s Dictionary”.



    An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.

    INSURANCE AGENT: My dear sir, that is a fine house – pray let me insure it.

    HOUSE OWNER: With pleasure. Please make the annual premium so low that by the time when, according to the tables of your actuary, it will probably be destroyed by fire I will have paid you considerably less than the face of the policy.

    INSURANCE AGENT: O dear, no – we could not afford to do that. We must fix the premium so that you will have paid more.

    HOUSE OWNER: How, then, can I afford that?

    INSURANCE AGENT: Why, your house may burn down at any time. There was Smith’s house, for example, which –

    HOUSE OWNER: Spare me – there were Brown’s house, on the contrary, and Jones’s house, and Robinson’s house, which –

    INSURANCE AGENT: Spare me!

    HOUSE OWNER: Let us understand each other. You want me to pay you money on the supposition that something will occur previously to the time set by yourself for its occurrence. In other words, you expect me to bet that my house will not last so long as you say that it will probably last.

    INSURANCE AGENT: But if your house burns without insurance it will be a total loss.

    HOUSE OWNER: Beg your pardon – by your own actuary’s tables I shall probably have saved, when it burns, all the premiums I would otherwise have paid to you – amounting to more than the face of the policy they would have bought. But suppose it to burn, uninsured, before the time upon which your figures are based. If I could not afford that, how could you if it were insured?

    INSURANCE AGENT: O, we should make ourselves whole from our luckier ventures with other clients. Virtually, they pay your loss.

    HOUSE OWNER: And virtually, then, don’t I help to pay their losses? Are not their houses as likely as mine to burn before they have paid you as much as you must pay them? The case stands this way: you expect to take more money from your clients than you pay to them, do you not?

    INSURANCE AGENT: Certainly; if we did not –

    HOUSE OWNER: I would not trust you with my money. Very well then. If it is certain, with reference to the whole body of your clients, that they lose money on you it is probable, with reference to any one of them, that he will. It is these individual probabilities that make the aggregate certainty.

    INSURANCE AGENT: I will not deny it – but look at the figures in this pamph –

    HOUSE OWNER: Heaven forbid!

    INSURANCE AGENT: You spoke of saving the premiums which you would otherwise pay to me. Will you not be more likely to squander them? We offer you an incentive to thrift.

    HOUSE OWNER: The willingness of A to take care of B’s money is not peculiar to insurance, but as a charitable institution you command esteem. Deign to accept its expression from a Deserving Object.

  12. Pouncer

    A successful event manager or promoter knows that if you want people to be excited about the event you’re having, you have to create some buzz around it. Often times, the best way to get your crowd pumped up is by offering a grand prize. This could be anything from a new boat or car to a big check! In any case, each participant has the opportunity to win your grand prize during your event.

    Hole in one and prize indemnity insurance started gaining popularity in the 80’s, as a way to help protect event managers and promoters who wanted to offer grand prizes to their contestants. It all started with Hole in One Tournaments but has since expanded to other sports (like Basketball’s half-court shot, Hockey’s blue-line goal, and Baseball’s Batter-Up promotions).

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