Insurance 101

Cam Fentriss, FRSA LEGISLATIVE COUNSEL

Since we are in between legislative sessions and other government things, maybe it’s a good time to consider a more general topic: insurance. I am thinking about all kinds of insurance and the philosophy of the origins of it and what is today’s mindset about it. This could be a whole book, but I will try to keep it short and probably not too sweet.

“Insurance” is a tool to protect from financial loss. The theory of insurance is that many pay a relatively small amount so that the expected percentage (usually small percentage) of those who incur damage can be paid for the loss from that pool of funds. This is the concept of spreading the risk.

Here is what insurance is NOT: a) a savings account that takes the place of paying for known and expected expenses; b) a jackpot for someone who does not want to work or pay his or her own way; c) an easy and/or inflated revenue source for entities that provide services covered by insurance (examples: lawyers, body shops, health care providers); d) an opportunity for politicians to mandate payment through insurance premiums for something that makes them look good; e) permission to collect a lot of money for very little in return; or f) any kind of entitlement.

I think it’s fair to say that the concept of insurance is a little strained in our society today. The absolute best example of that is the years long fight in Congress about the Affordable Care Act (aka Obamacare). I don’t know about you, but the only thing I have really taken away from it all is that this is so much more complicated and multi-dimensional than everyone except about 20 experts know (and none of those experts serves or even has served in Congress or in the White House). There are so many pieces to this puzzle that the problems with the existing system and the difficulties in crafting a replacement or an exit strategy should not be a surprise to anyone.

There are other examples closer to home. For us, workers’ compensation insurance is a good example. For legal and liability reasons, workers’ comp insurance works best as something mandated by law. And while the mandate works to protect employers and assure
employees, it also works to attract service providers that, not only want to make a buck, but they also want to charge higher prices because the law requires that employers buy the insurance.

Another example is property insurance. While not mandated by law, it is usually mandated by any company that holds a mortgage on property. In recent years, this insurance product has become a target for service providers looking to grab as much insurance proceeds business as possible - think assignment of benefits.

We have all watched premiums for most insurance products climb and some have risen dramatically. Why is that? The obvious reason is that prices for just about everything go up over time. But that does not seem to explain a lot of the extraordinary increase. I think there are a few very direct reasons for unusual increases in the cost of insurance.

First, if insurance coverage is available, those who provide services will show up, ready to bill, bill, bill. It makes no sense that more services would be needed just because insurance coverage is available, but that is exactly what happens often enough.

Second, consumers are often tempted to “recoup” their insurance premiums even if they do not need the intended coverage. What does that mean? An example would be the person who has paid $1,000 in insurance premiums and sees an opportunity to claim an ordinary repair is actually damage subject to insurance coverage so that he does not have to pay for the repair which is worth at least what he has paid in insurance premiums. He feels so clever and shrewd but he is really doing no more than cheating the system and ultimately himself.

Third, when insurance is paying the bills, there is less incentive for the consumer to pay attention to the charges. The best example of this problem is with health insurance where, I think we can all agree, the bills and statements from health care providers are nearly impossible to decipher. A consumer who has insurance that covers all the cost will usually be quick to give up trying to understand a statement since he is not paying it anyway. I will bet this causes a significant amount of overpayment or payment for services never delivered and some of that is not even a mistake.

Fourth, there is an urge among politicians (ALL politicians) to bring home the bacon because they know that is most likely to get them re-elected. Finding something to bring home is usually the easy part. The harder part is finding a way to pay for it. Traditionally, the way to pay the bill has been through a tax increase. It’s a simple formula: raise a tax on millions of people by a small amount, that brings in tens of millions, and just like that, the new _____ [insert project in blank space] is paid for in a painless way. That worked great until those pennies added up, and “tax increase” became the dirtiest of all terms in politics.

In searching for alternate ways to painlessly pay for that bacon, one of the discoveries was that, through insurance and by law, you can throw “We The People” a bone, the cost of which just gets folded right into everyone’s insurance premiums. That’s even better than those tax increases because it makes the insurance companies (not the politicians) look like the bad guys. Win-win!

Who can complain if a legislature or Congress forces insurers to provide coverage for a condition or event for which they are collecting premiums. That is only fair. But the “bacon” problem is created when politicians force insurers to pay for something that is
not legitimate for insurance coverage. The best example of that is covering the cost of an annual checkup. As the name implies, an annual checkup is something everyone should get every year – it is not a risk to be covered like a disease that will hit less than all people covered.

To explain in mathematical terms, if one in 1,000 people will need surgery that costs $2,000, then 1,000 people insured can each pay $2 in insurance premium. If 1,000 in 1,000 people need an annual checkup that costs $200, then 1,000 people will need to each
pay $200. If that cost is passed through an insurance policy, then each person will also pay an administrative cost because insurance companies cannot provide the processing of this for free. That checkup just got more expensive AND the government is forcing you to pay for it, even if you don’t go and get that checkup.

This is the point where I usually try to sum it all up, but I have nothing to offer in summary. I do know that we all have to work together to try to get this train back on the tracks, but I do not know how to even start. All suggestions are welcome!

FRM

Anna Cam Fentriss is an attorney licensed in Florida since 1988 representing clients with legislative and state agency interests. Cam has represented FRSA since 1993, is an Honorary Member of FRSA, recipient of the FRSA President’s Award and the Campanella Award in 2010. She is a member of the Florida Building Commission Special Occupancy Technical Advisory Committee, President of Building A Safer Florida Inc. and past Construction Coalition Chair (1995-1997).