Insurers regulated; no surprise in their profits
By CHARLES P. MOORE
In recent months, President Barack Obama and the Democrats have been hammering the insurance companies for their greed in making premiums inordinately high, especially for health care policies. I had the benefit over my 45 years as an actuary to see up close and personal the machinery of several insurance companies. Keep in mind that issuing a life insurance policy or a health care policy to a person or to an employer for his group of workers requires some underwriting of the risk associated with those policies.
For example, a life policy is taken out by a person in the amount of $100,000. The policy states that upon the death of the policyholder, his beneficiary, typically his wife, will receive the $100,000. That’s simple enough, but the insurance company must find out something about the potentially insured before the policy can be issued and payments for the benefit begin. If you select a person randomly from a very large group of people age 35, you have no idea whether that person is going to die next week, or live to be 92 years old. This is where underwriting comes into the picture.
The insurance company gets a medical history from the person and whether he is a smoker, whether he is a heavy drinker or whether he is a window washer in tall buildings or works at a desk, et cetera. The insurer can then "rate" the person and determine, based on that rating, how much the premium for that person should be.
Similarly, when a health care policy is sold, the insurer often refuses to sell the policy based on existing medical problems of the buyer. Sometimes, the policy is issued, excluding the cost flowing from the existing condition.
Now, the part that few people know or understand. The insurance departments of every state regulate all the insurance companies in the state. Having been there, I know how regulated the insurance companies are. Before they can market a new kind of life or health policy, they must submit pounds of paper setting forth all the details of the policy and then the actuarial assumptions used in determining the premium, such as the mortality or morbidity table used, the interest rate on the policy, the commission to the agent or agents and the profit margin built in. These insurance departments of the states have their own actuaries on staff who are familiar with all the facets of the calculations and the propriety of each of the assumptions. I can’t think of any business that is as regulated by the states as are insurance companies.
Finally, you must understand that hundreds of insurance companies sell these policies and they all are competing with each other for the best features of the policies and the lowest possible cost. Many of the Democrats in Congress know all about this, but it is convenient and easy to use the mantra that insurance companies are making such an inordinate profit that government health care can do it so much better and cheaper. Don’t you believe it.
Moore lives in Ormond Beach.