Nancy Pelosi calls the insurance executives the “villains.” But is it really the case that the insurance industry is immoral?
The answer to this question was probably best provided by Jessica Rabbit, the femme fatale in “Who Framed Roger Rabbit?” when she said, “I’m not bad. I’m just drawn that way.”
I covered the insurance industry for Newsweek ages ago and became convinced that within the concept of insurance there were actually two moral impulses at war with each other.
First, insurance is supposed to “spread risk.” This is a moral good, and and on some level a deeply religoius insight. It codifies, in legalistic language and actuarial charts, the colloquialism, “There but for the Grace of God go I.” We may be fine now but life is fragile and we could have our day of despondency so let’s each make a small sacrifice (in the form of our insurance premium) in order to get the comfort that when our time comes, we won’t be destroyed.
The implicit message is powerlessness. Though we have some control over our lives, it’s not total, and on the big things — illness, fire, earthquakes — we are at the hands of fate or luck or God’s will. Insurance protects us from the power’s beyond our control, not powers within our control.
Early life insurance executives actually made explicitly religious arguments for the risk-sharing aspects of insurance. “The principles of life insurance are sanctioned by the spirit of christianity…[tracable to early Christians who] sold off their individual possessions and held everything in common,” wrote one executive, as quoted in Viviana Zelizer’s book, “Morals and Markets.”
But there’s another principle embedded within the concept of insurance. Personal responsbility and risk reduction. In truth, insurance companies are not only in the business of spreading risk, they’re also in the business of reducing risk. You get higher premiums if you smoke. You get lower home insurance premiums if you have an alarm. If you own a roller coaster, you’ll pay higher liability rates than if you sell mattresses.
This makes economic sense for insurance companies. If they charge more for higher risks, they can increase their profit. But often, this system of carrots and sticks has a social value too. By rewarding good behavior and punishing bad, it creates financial incentives for businesses and individuals to aspire toward healthiness and safety. An amusement park that tests its roller coaster regularly might get a lower premium than those that don’t. Some might take defensive driving courses to get lower auto insurance rates or put a smoke detecter in their home.
The problem is that from a business point of view, it’s in an insurance company’s interest to emphasize the second value over the first. And taken to its logical extreme, it leads to underwriting practices that don’t just mitigate risk but attempt to eliminate risk for insurance companies. This is why we have occasional “insurance crises” in which suddenly whole industries become uninsurable. It’s why we have companies refusing to insure people with pre-existing conditions. At that point, insurers have substituted both the first principle (risk spreading) and the second principle (risk reduction) with a third one, the legal obligation to maximize shareholder profit.
If your mutual fund holds stock in a health insurance company, you benefit from this practice. Health insurers are simply trying to maximize their profits by reducing their risk. They’re not bad, they’re just drawn that way.
Unfortunately, this form of risk reduction no longer has social value. What good behavior is encouraged when someone can’t get insurance because they’ve had cancer? It’s not like women will start saying, “Oh! Well, now that I see the financial risks, I guess I won’t choose to get ovarian cancer after all!”
Though there are some practices that are morally indefensible — deceptive marketing, for instance — insurance companies are mostly following, rationally, the logic of their business and their ethical responsibiliteis to their shareholders. If one insurer were to try to buck the system, agreeing to accept those with pre-existing conditions, they would see their profits and share price go down. Perhaps they’d even be subject to a shareholder lawsuit.
This is when government regulation become morally preferable. When companies are doing the “right thing” according to the rules of their profession and yet it’s leading to social injustice, then the rules need to be rewritten. That way, insurance companies can do the right thing by customers without feeling their doing the wrong thing by shareholders. Insurers need not be demonized. They just need to be drawn differently.
Also printed on The Wall Street Journal Online