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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