Speaker 1: Welcome to How to Money. I'm Joel and I am
Speaker 1: mat and today we're talking about why insurance is so
Speaker 1: funky with Amy Finkelstein.
Speaker 2: That's right, purchasing and insurance policy. Honestly, it's one of
Speaker 2: those seemingly boring tasks that a companies entering adulthood.
Speaker 1: And so whether it was like.
Speaker 2: Your parents just making you chip in on the higher
Speaker 2: costs of car insurance because you were a teenage driver,
Speaker 2: or maybe seeing the health insurance deduction come out of
Speaker 2: your paycheck every two weeks that line item, or maybe
Speaker 2: you're at the point now too where you've realized it's
Speaker 2: time to get a life insurance policy because you have
Speaker 2: folks who are dependent on your income. Either way, it's
Speaker 2: typically adult task to get insurance, and we just file
Speaker 2: it away, you know, those documents like we either save
Speaker 2: them on a folder on our computer, we follow them
Speaker 2: away without giving them much thought. But our guest, Amy Finkelstein,
Speaker 2: who is a distinguished Professor of Economics at MIT, she
Speaker 2: is here today to explain why insurance is actually fascinating.
Speaker 2: She writes about this along with her co authors in
Speaker 2: her new book Risky Business, and she writes just how
Speaker 2: understanding the insurance market, how it can help us to
Speaker 2: understand why it's so expensive, what types of policies out
Speaker 2: there are just terrible, and even what steps we can
Speaker 2: do to reduce the cost of insurance in our own lives. Amy,
Speaker 2: thank you so much for joining us today on the podcast.
Speaker 3: Thanks so much for having me here.
Speaker 1: Glad to have you. Amy. The first question that we
Speaker 1: ask everyone who comes on the show is what they
Speaker 1: like to splur John, Matt and I were drinking a
Speaker 1: delicious triple ipa right now, and so that's something that
Speaker 1: we spend some would say too much money on, but
Speaker 1: we're still being smart, saving and investing for the future.
Speaker 1: What is that thing you like to splor John in
Speaker 1: your life.
Speaker 3: That's a great question. I'd say the thing I spend
Speaker 3: too much money on. It's not to say I spend
Speaker 3: very much of it at all, but any amount is
Speaker 3: too much. Is you know those like candy stores that
Speaker 3: have like the glass jars full of candies you pay
Speaker 3: by the pound or whatever. I just love going in
Speaker 3: there and like scourging on some like M and MS,
Speaker 3: and it drives my husband nuts. He's like, literally, you
Speaker 3: could just go to the convenience store and buy a
Speaker 3: pack of EM and MS, and it would be so much.
Speaker 3: There's something about the act of, you know, getting it
Speaker 3: from those glass jars, scooping them out of the big bin,
Speaker 3: putting them in my paper bag, and eating them from
Speaker 3: that bag rather than from the pack, and the convenience.
Speaker 1: It's like a sensory experience. Isn't like that?
Speaker 2: Is it? Because I feel like that's the old school
Speaker 2: way of getting candies. Does it harken back to a
Speaker 2: life that we no longer childhood no longer exists.
Speaker 3: Or I'm that old? But thanks for the thought. I
Speaker 3: don't know that. I think initially it just was like
Speaker 3: I was in there, and you know, I like it.
Speaker 3: There's something about the feeling, the sensory experience, and now
Speaker 3: it's the fact that it is literally a waste of money.
Speaker 3: They're a very small waste of money, but sometimes it
Speaker 3: just feels a little bit rebellious and a little bit
Speaker 3: you know, decadent. Yeah, to do it.
Speaker 2: I love it. No, I think that's the coolest thing ever, because,
Speaker 2: like like your husband says, you could you could go
Speaker 2: to Costco and buy like a five pound bag of
Speaker 2: it for absolutely nothing, But for you to go into
Speaker 2: that candy store. There's yeah, there's a there's an entire
Speaker 2: experience associated with that. And I say more parad I
Speaker 2: like that, this is what you do with your rebellius streak.
Speaker 2: You don't go out there and get tattoos or like,
Speaker 2: this is how you live that out.
Speaker 3: I mean, you know, I'm an economics professor. There's a
Speaker 3: limits to Bellian looks.
Speaker 2: Like right, Amy, Okay, let's let's get into insurance. How
Speaker 2: is it that insurance differs from broccoli specifically? And then
Speaker 2: how did broccoli And it's sort of a roundabout way
Speaker 2: cause you to write this book?
Speaker 3: Well, thank you so much for asking that question, because
Speaker 3: we my co authors Lauren and iv and Ray Fisman
Speaker 3: and I actually somewhat jokingly, somewhat seriously thought of titling
Speaker 3: the book why is Insurance different from broccoli? Except that
Speaker 3: we decided that putting two things no one likes in
Speaker 3: your title is probably worse than just one.
Speaker 1: The publisher was like, no, you guys can't exactly.
Speaker 3: But to tell you the origins of that question, it
Speaker 3: actually goes back to twenty twelve, during the Supreme Court's
Speaker 3: hearing of oral arguments about whether the mandate in the
Speaker 3: Affordable Care Act otherwise known as Obamacare, that everyone had
Speaker 3: to buy health insurance, whether that was constitutional, whether you
Speaker 3: could mandate that as the Act did, that everyone had
Speaker 3: to buy health insurance. And at the risk of stating
Speaker 3: the obvious, I and I presume my co authors, so
Speaker 3: I won't implicate them. I know nothing about the law
Speaker 3: or constitutional law. So we were just interested because we're
Speaker 3: interested in policy, and particularly policy around insurance. And so
Speaker 3: it was somewhat startling to hear then Supreme Court Justice
Speaker 3: Antonin Scalia, during oral arguments, ask the question, well, if
Speaker 3: the government can mandate that people buy health insurance, can
Speaker 3: it also mandate that people buy broccoli or eat their broccoli. Now,
Speaker 3: obviously he was making a rhetorical point, trying to conjure
Speaker 3: up the image of a you know, intrusive state. And
Speaker 3: I would warrant that, you know, he's a very smart man,
Speaker 3: or he was before he passed away. I'm sure he
Speaker 3: knows the difference between insurance and broccoli. But the fact
Speaker 3: that he could even score rhetorical points on that question
Speaker 3: made us, as insurance afficionados or insurance geeks, you know,
Speaker 3: sort of sit up and take note that you know
Speaker 3: that if a Supreme Court justice could ask that question,
Speaker 3: we dare say, there are a lot of people in
Speaker 3: the world that don't understand what we see as the
Speaker 3: fundamental difference between insurance, and so I'll let you know
Speaker 3: what it is. It's actually quite simple, but it's very important.
Speaker 3: It's that the supermarket doesn't care who buys its broccoli.
Speaker 3: The costs to the supermarket of purchasing the broccoli and
Speaker 3: reselling it are the same no matter which customer buys it.
Speaker 3: But your insurer cares a great deal about who they
Speaker 3: sell insurance to. And that's because insurance is an example
Speaker 3: of what economists call a selection market. Labor markets are
Speaker 3: another example, credit cards, certain types of education in which
Speaker 3: the profits of the organization selling the product depend not
Speaker 3: only on how much they sell, like in any market,
Speaker 3: including the market for broccoli, but also on who they
Speaker 3: sell to. So if you're a auto insurer and you
Speaker 3: sell to a accident prone, risky, reckless driver, it's going
Speaker 3: to cost you more in claims you have to pay
Speaker 3: out than if you sell to a boring safety you know,
Speaker 3: middle aged woman like myself, who you know, inches along
Speaker 3: in her car, writes. Actually, as we talk about in
Speaker 3: the book not to have any spoilers. I'm separately a
Speaker 3: terrible driver, But that's an example of private information we'll
Speaker 3: get into and so and so. Why is that a problem.
Speaker 3: It's because if if the insurance company doesn't know if
Speaker 3: you're a good driver or a bad driver, and it
Speaker 3: sets its price based on sort of a typical accident rate,
Speaker 3: maybe for someone of your basic demographics, who's going to
Speaker 3: find that product particularly appealing. Well, the ones who know that,
Speaker 3: they tend to get into a lot of fender benders
Speaker 3: or worse, and they're going to have a lot of
Speaker 3: claims on their uh, make a lot of claims on
Speaker 3: their policies. So what that's going to do is increase
Speaker 3: the costs to the insurance company of providing that insurance,
Speaker 3: and they're going to have to raise their price. And
Speaker 3: that is a real problem because then the safe driver,
Speaker 3: the ones who tend to have very few accidents, are
Speaker 3: going to be faced with having to pay a ridiculously
Speaker 3: high price for their automobile insurance. And the reason that's
Speaker 3: a problem is because I think the fundamental misconception about
Speaker 3: insurance is it's about reducing risk, So you want it
Speaker 3: whether you're safe or like myself a rather terrible driver,
Speaker 3: because everyone, no matter how careful they are, can be
Speaker 3: unfortunate enough to get into an auto accident. No matter
Speaker 3: how healthy they are, they can have a medical expense,
Speaker 3: et cetera, et cetera. So the promise, dare I say,
Speaker 3: the excitement of insurance is it can help each and
Speaker 3: every one of us achieve some measure of peace and
Speaker 3: security in an uncertain and dangerous world. And the problem
Speaker 3: is when there's this selection problem that people know more
Speaker 3: than the insurance company knows about how likely they are
Speaker 3: to have claims, it can go in and ruin the
Speaker 3: market for everyone.
Speaker 1: I just want to say, first off, you're getting me
Speaker 1: pumped up. Get your enthusiasm is contagious. It am getting
Speaker 1: about insurance.
Speaker 2: I'm going to go ahead and apologize for calling insurance
Speaker 2: boring from early on, Amy.
Speaker 3: Thank you very much.
Speaker 2: That means a lot.
Speaker 1: Right, Well, talk to us about how insurance rates are determined, Amy,
Speaker 1: because for instance, you say in your book that all
Speaker 1: State had like three pricing tiers back in the day.
Speaker 1: It was kind of basic in how you chose the
Speaker 1: sort of driver's insurance, the auto insurance that you that
Speaker 1: you had. Now they have like fifteen hundred tiers. Why
Speaker 1: is it so complicated? Why has it gotten so much
Speaker 1: more complex over the years.
Speaker 3: So that's a great question if you start with the
Speaker 3: problem being the one I described it. Insurance is something
Speaker 3: that can benefit everyone, the high risk and the low risk.
Speaker 3: But that if customers know more about how likely they
Speaker 3: are to have accidents or claims, and the insurance company
Speaker 3: knows the high cost, customers are likely to flood the market,
Speaker 3: driving up prices and making the product worse for everyone.
Speaker 3: And sometimes in extreme cases, as we talk about in
Speaker 3: the book, examples of markets that can be made to
Speaker 3: completely disappear. Then these can be hard to think of
Speaker 3: because they don't exist, so you're not confronted with them.
Speaker 3: But we give examples in the book, like the market
Speaker 3: for layoff insurance if you lose your job, or the
Speaker 3: market for divorce insurance, which actually some entrepreneur tried to
Speaker 3: offer and guess guess what they found that you know
Speaker 3: who tended to buy those policies. Anyways, exactly if you
Speaker 3: didn't already dislike your spouse, hearing that he just bought
Speaker 3: divorce insurance, might might be might be the extraw that
Speaker 3: broke the camera but but so, of course, not all
Speaker 3: insurance insurance markets do exist. You can buy automobile insurance,
Speaker 3: life insurance, pet insurance, many examples that we talk about
Speaker 3: on the book, and part of the way that those
Speaker 3: markets function or function partially is precisely because insurers try
Speaker 3: to undo the informational advantage of the customer by collecting
Speaker 3: all kinds of information about them. So if you've ever
Speaker 3: filled out an automobile insurance application, or if you're as
Speaker 3: crazy as us and you do it just for fun
Speaker 3: or as part of research and writing this book, you'll
Speaker 3: find that they ask not only a bunch of I think,
Speaker 3: pretty natural and straightforward questions such as how long have
Speaker 3: you had your license, how many accidents have you had
Speaker 3: with the make and model of your car, et cetera,
Speaker 3: but they also ask a bunch of questions that might
Speaker 3: seem very odd, Like they ask about your credit score,
Speaker 3: they ask about your marital status, they ask about your GPA.
Speaker 3: We were kind of excited about that one, since we're professors,
Speaker 3: and so why are they doing that. It's because it
Speaker 3: turns out that actuaries who've spent some time playing with
Speaker 3: large amounts of data on people who buy automobile insurance
Speaker 3: have found that, you know, it turns out people with
Speaker 3: higher grades tend to be safer drivers. Not everyone, but
Speaker 3: you know, on average, marital status is a predictor of accidents,
Speaker 3: et cetera.
Speaker 1: What about whether or not you have divorce insurance?
Speaker 3: Is that that I don't know. But so they ask
Speaker 3: all these questions to try to equalize the playing field,
Speaker 3: as it were, level the playing field so that the
Speaker 3: market can function. And one of the things that we
Speaker 3: talked about in the book that we at least found
Speaker 3: pretty surprising is, you know, we start with the history
Speaker 3: of life insurance in the time of ancient Rome, and
Speaker 3: perhaps it's not surprising then that when they weren't even
Speaker 3: pricing based on age, you know, customers were able to
Speaker 3: you know, game the market. But even today, in the
Speaker 3: information age and the you know, in the age of
Speaker 3: big data, it still turns out that not first time drivers,
Speaker 3: but you know, once you've been a driver for a
Speaker 3: couple of years, it turns out you still know more
Speaker 3: about your risk, your likelihood of having an accident than
Speaker 3: what the insurance company can figure out even with all
Speaker 3: these detailed questions, So you still get the problems that
Speaker 3: selection causes which are either non existent insurance or very
Speaker 3: expensive insurance, or insurance with all kinds of clauses and
Speaker 3: fine print and waiting periods, all designed to try to
Speaker 3: combat these these selection problems.
Speaker 2: And this makes sense that the different companies out there,
Speaker 2: So we're talking about car insurance, auto insurance, So using
Speaker 2: that as an example, like there are different companies, different
Speaker 2: providers out there that want to track your driving for instance,
Speaker 2: Like that is a piece of data that they want
Speaker 2: to know. They want to know how often you drive
Speaker 2: at night, how quickly you accelerate, how quickly you stop
Speaker 2: with the accelerometers that are built into your phone. And
Speaker 2: so that makes sense. And I'm curious what you think
Speaker 2: our response to that should be. I mean, should it
Speaker 2: be to say, yeah, all right, let's let's give you
Speaker 2: all the information possible in order to make this a
Speaker 2: more efficient market, or do you see that being a
Speaker 2: problem just from like essentially from a privacy certain standpoint.
Speaker 3: It's a great question, and I'm going to give the
Speaker 3: annoying economist answer. So President Truman apparently famously equipped that
Speaker 3: he wished he could find a one handed economic advisor
Speaker 3: because his economist advisors were always saying on the one hand, this,
Speaker 3: on the other hand, that so and in the book,
Speaker 3: I think we're very upfront from the beginning that if
Speaker 3: you're looking for simple solutions and clear, you know, clear
Speaker 3: ways forward. That's for the most part, we have a
Speaker 3: couple of things that we think are very obvious, and
Speaker 3: every war should be obvious to everyone. But for the
Speaker 3: most part, our goal is not to say, well, this
Speaker 3: is the right way to think about it, but to
Speaker 3: lay out the trade offs. And in the example you gave,
Speaker 3: you know, the the pro side of letting insurers collect
Speaker 3: as much information as they want and price on as
Speaker 3: much information as they can is precisely what you were
Speaker 3: alluding to help make the market work better. There are
Speaker 3: two very important drawbacks that have to be weighed against.
Speaker 3: That one is the one that you already alluded to,
Speaker 3: which is notions of privacy. Right, at some point, maybe
Speaker 3: it's just creepy to have to know that your automobile
Speaker 3: insurance company is tracking you on your phone, and you know,
Speaker 3: I know my teenagers think it's creepy that I can
Speaker 3: track them. You know, how much creepier to know that
Speaker 3: my insurer is also knowing where I am? Although perhaps
Speaker 3: they'd prefer that. But the other issue is something that
Speaker 3: relates to the question of what it is we're trying
Speaker 3: to ensure. So if you price on all the predictors
Speaker 3: of risk, then you get rid of the issue of
Speaker 3: private information and selection at a point in time, But
Speaker 3: in doing so, you destroy the market for insurance against
Speaker 3: being the type of person who's a high risk. So
Speaker 3: a sort of silly example we give in the book
Speaker 3: is it's not my fault that I'm a bad driver?
Speaker 3: Why can't I Why should I have to pay more
Speaker 3: for insurance? I was born incompetent. A slightly more there
Speaker 3: is or a much more serious example, you know, when
Speaker 3: it gets into issues of whether insurance should be able
Speaker 3: to price health and life insurance differently for people who
Speaker 3: have a elevated risk of some genetic disease a breast
Speaker 3: cancer gene for example. So on the one hand, if
Speaker 3: they're not allowed to, that means that people who know
Speaker 3: they have a family history that puts them at risk
Speaker 3: for this think they're on average more likely to have
Speaker 3: medical expenses and are going to buy insurance, driving up
Speaker 3: the price for everyone. On the other hand, if they're
Speaker 3: not allowed to price insurance based on this, you're going
Speaker 3: to get that selection problem. On the other hand, if
Speaker 3: they are, then then you know, sort of before we're born,
Speaker 3: or behind the veil of ignorance, as it were, there's
Speaker 3: no insurance against being unfortunate enough to be at elevated
Speaker 3: risk for certain diseases. And we give one example of
Speaker 3: how this played out. I think we could all agree
Speaker 3: quite badly in the sense that in New York and
Speaker 3: New Jersey in the nineteen nineties, in the small group
Speaker 3: health insurance markets, so not the employer provided market, but
Speaker 3: the market for people who don't have employer provided health insurance,
Speaker 3: both states, at different points decided that it was not
Speaker 3: fair to charge people different prices for sort of more
Speaker 3: generous coverage based on their age, or their gender, or
Speaker 3: their pre existing health conditions. So they outlawed that. They
Speaker 3: imposed what's called community rating, which means everyone in the
Speaker 3: community has to be offered the same price for insurance
Speaker 3: and also guaranteed issue you can't refuse to serve some customers.
Speaker 3: And this was done, we believe in the out of
Speaker 3: a fairness or equity goal. What ended up happening is
Speaker 3: the market for this more comprehensive insurance unraveled completely and
Speaker 3: got destroyed because when you set the price, when you're
Speaker 3: allowed to price based on anything, the people who are
Speaker 3: more likely to find that a good deal are the
Speaker 3: ones who already know they have some pre existing condition,
Speaker 3: or they're older, are going to have more medical expenses.
Speaker 3: And so the result was there was a classic death spiral.
Speaker 3: Claims kept going up, so the insurer kept raising prices,
Speaker 3: so the people who stayed in were even sicker, and
Speaker 3: on and on it went till the market essentially collapsed completely.
Speaker 3: And so we sort of say, on the one hand,
Speaker 3: that's fair, everyone faces the same terrible situation of no insurance.
Speaker 3: But it was a sort of beggar thy neighbor fairer
Speaker 3: where we made everyone worse off in the interests of fairness,
Speaker 3: and that, at least to us, seemed a little extreme.
Speaker 1: Yeah, it's kind of like the American Airlines All you
Speaker 1: Can Fly Misshap story the detail or early in the
Speaker 1: book as well, which is just a fascinating read. And
Speaker 1: we actually want to talk more about healthcare, health insurance,
Speaker 1: how messed up that is, and along with some other
Speaker 1: questions we have for you Amy about insurance. We'll get
Speaker 1: to those right after this.
Speaker 2: We are back and we're talking about insurance with Amy
Speaker 2: Finkelstein and Amy, I guess we kind of want to
Speaker 2: get a little more practical as well, and so on
Speaker 2: an individual level, we kind of talked about insurance from
Speaker 2: a very high view, why it is that some markets fail,
Speaker 2: why they collapse completely. But on an individual level, why
Speaker 2: is insurance so often misunderstood? Specifically in what ways are
Speaker 2: everyday folks like us, like our listeners out there, how
Speaker 2: are folks using insurance improperly?
Speaker 3: Perhaps that's a really good question. I think the first,
Speaker 3: or perhaps the most important thing to understand about insurance
Speaker 3: is that insurance is about protecting against risk, not getting
Speaker 3: the policy once you know you need it. Once you
Speaker 3: know you need it, it's too late. You can't the
Speaker 3: risk has occurred and there's nothing to be done for you.
Speaker 1: Kind of like didn't your husband try to get triple A?
Speaker 3: I was about to throw them under the bus for
Speaker 3: so please do please do right? So, the point about
Speaker 3: durrance is you can't wait till the accident occurs to
Speaker 3: try to ensure it. And the example, one of the
Speaker 3: examples we give in the book is my hapless husband. Hapless,
Speaker 3: and perhaps many respects, but in this particular respect. We
Speaker 3: were in graduate school and he had an old, beat
Speaker 3: up car and he had you know, bare bones Triple
Speaker 3: A towing insurance that I think would only tow you,
Speaker 3: you know, to the nearest gas station or something. And
Speaker 3: his car broke down and he decided that he really
Speaker 3: wanted to go to his trustee childhood mechanic, who he
Speaker 3: was sure would treat him well, give him a good deal.
Speaker 3: And that was, you know, more than the nearest nearest
Speaker 3: gas station, who was about I think twenty miles away
Speaker 3: from from his childhood home. So you know, this was
Speaker 3: actually in the early days of cell phone, so this
Speaker 3: was the late nineties, so he's very happy he had
Speaker 3: a cell phone and he used it to standing there
Speaker 3: by the side of the road with his broken down
Speaker 3: car to call Triple A an upgrade to the premium plan,
Speaker 3: which which you pay more per month for the insurance.
Speaker 3: But one of the things that comes with is you know,
Speaker 3: towing of I think up to maybe one hundred miles
Speaker 3: or something. So you know, he thought he was very clever.
Speaker 3: The person on the other end happily takes his credit card,
Speaker 3: tells him that, you know, he'll be starting to pay
Speaker 3: higher premiums, you know, in the next payment cycle, and
Speaker 3: they'll upgrade that policy right away, sir, and it will
Speaker 3: go into effect in two weeks, right because waiting periods
Speaker 3: which are a frustrating aspect of insurance and do undermine
Speaker 3: some of the insurance value once you buy a policy
Speaker 3: or not really insured for the first two weeks, but
Speaker 3: they're designed precisely to deal with the situation in which
Speaker 3: people wait until they the risk has occurred to try
Speaker 3: to buy the policy. So that's one mistake that people make.
Speaker 3: I think a related mistake is that people can say, gosh,
Speaker 3: you know, I've been paying my homeowner's insurance for years
Speaker 3: and I've never had a pay I've never gotten a
Speaker 3: claim on it.
Speaker 1: What a waste cham I wish a tree had gone
Speaker 1: through my room.
Speaker 3: Well, precisely, like you know, that's exactly the point that
Speaker 3: actually you were getting something out of that insurance all
Speaker 3: those years. You were getting, you know, the peace of
Speaker 3: mind of knowing that if a tree did fall on
Speaker 3: your house, you would be covered. You wouldn't have to
Speaker 3: pay for that out of your own pocket. And therefore, relatedly,
Speaker 3: and this is where the economics part, not just the
Speaker 3: psychology comes in. You don't have to put money aside
Speaker 3: to save for the eventuality of you know, I might
Speaker 3: have a really expensive problem with my home. Instead, you
Speaker 3: can use that money on, you know, craft beer or
Speaker 3: overpriced M and M's, or whatever it is you like
Speaker 3: to splurge on, and knowing that you're just paying that
Speaker 3: small premium so that if something occurs. And the reason
Speaker 3: the premium is small is precisely because there's only some
Speaker 3: chance that it occurs. If you wait to buy it
Speaker 3: till it has occurred, you can't get a low premium.
Speaker 1: Matt's really been wanting to use his life insurance policy,
Speaker 1: and I keep trying to explain to him, Dude, it's
Speaker 1: not you probably don't, I don't think, so.
Speaker 2: Just keep waiting for that payday. You know what, am
Speaker 2: I gonna be able to enjoy?
Speaker 1: My life's going to be rich when that happens, exactly exactly.
Speaker 1: There's so many insurance products out there, though, and it's
Speaker 1: tough to know which ones to prioritize. I think you
Speaker 1: gave a clear idea understanding of what insurance is for,
Speaker 1: but how do we prioritize which insurance we bring into
Speaker 1: our lives? Like there are some requirements right to have
Speaker 1: certain kinds of insurance, Like if you're driving a car,
Speaker 1: you're breaking the law in I think forty nine states
Speaker 1: if you don't have auto insurance. But like, how do
Speaker 1: we know then after that, which insurance products make sense
Speaker 1: for us?
Speaker 3: Another great question. So first all up, vote don't break
Speaker 3: the law. That's a good one. But then I think
Speaker 3: when you have the choice, you want to think about
Speaker 3: insurance as insuring large risks, right, because if you go
Speaker 3: back to the notion of if you don't have insurance,
Speaker 3: you have to put a lot of money aside just
Speaker 3: sitting there in case something happens. You know, if it's
Speaker 3: a very small cost, if the risk occurs, maybe it's
Speaker 3: not worth it to buy the insurance given that they're
Speaker 3: you know, evidently you know, always some administrative costs or
Speaker 3: insurer profits that are baked in. So we try to
Speaker 3: ensure things that, you know, like like our home, because
Speaker 3: if our home had a major problem or you know,
Speaker 3: burned down or something that would be not something we
Speaker 3: could afford to fix ourselves. But we don't ensure our toaster,
Speaker 3: or our television or our vacations because those are things
Speaker 3: that yes, it would be very unfortunate and annoying, and
Speaker 3: I wouldn't be nearly as sanguine as I'm sounding now
Speaker 3: if our you know, if we missed our vacation. But
Speaker 3: those are relatively small costs and therefore probably less important
Speaker 3: to have insurance for it. It's the big things that
Speaker 3: you want insurance for. One way you can actually get
Speaker 3: a good deal on insurance is if you recognize that principle.
Speaker 3: Then again, go back to homeowners insurance. You want to
Speaker 3: get a policy that pays for the catastrophic risk. But
Speaker 3: maybe you're okay with even a pretty big deductible because that,
Speaker 3: you know, a sort of a certain amount that you
Speaker 3: have to pay yourself first before the insurance will pay,
Speaker 3: because that can dramatically lower the premium. And the reason
Speaker 3: it can dramatically lower the premium is precisely the selection
Speaker 3: problem that our book is about. That if you know
Speaker 3: your home is, you know, falling apart at the seam,
Speaker 3: so to speak, you're going to want a very comprehensive policy.
Speaker 3: You're not going to want, you know, the first five
Speaker 3: or ten thousand dollars that you have to pay out
Speaker 3: of pocket. And so if you're if you're willing to
Speaker 3: forego that first five or ten thousand dollars, you can
Speaker 3: get a much much lower premium to cover the rest
Speaker 3: of the of the cost should something really catastrophic happens.
Speaker 3: It does mean that, you know, if you have a
Speaker 3: minor boiler leak, you may be out of pocket yourself.
Speaker 2: Right basically, like you're talking, you know, the way to
Speaker 2: think about what insurance products to choose is to ensure
Speaker 2: there's larger items. And I think even said this word,
Speaker 2: but if there is an expense in our life that
Speaker 2: might be relatively large. And the problem there for a
Speaker 2: lot of different folks is that we all have different incomes,
Speaker 2: we all have different networths, different amounts of money in
Speaker 2: the bank. Do you have any sort of rule of
Speaker 2: thumb or is there maybe just a healthy way to
Speaker 2: think about how individuals should be making that calculation themselves.
Speaker 2: Because for one person, the idea of ensuring like a
Speaker 2: trip or vacation trip insurance, that would be annoying, but
Speaker 2: I can handle that. But for somebody else, for instance,
Speaker 2: who may not have any money in the bank, and
Speaker 2: this was you know, they scraped together pennies and dollars
Speaker 2: over the course of years in order to make it
Speaker 2: to this destination for their honeymoon, that kind of thing.
Speaker 2: It would be a really big deal. And so I
Speaker 2: would like to get your thoughts on maybe how to
Speaker 2: approach that dilemma.
Speaker 3: Yeah, that's interesting. So your example already made me think
Speaker 3: of something that I wouldn't necessarily have thought of without it,
Speaker 3: which is, you know, ensuring against unpleasant things happening is
Speaker 3: a little different from insuring against expenses that you have
Speaker 3: to pay so to take the trip. Example, when I
Speaker 3: said we don't think we should ensure our trips, it's
Speaker 3: not because, oh, if our trip is canceled, we'll just
Speaker 3: you know, go out and immediately schedule another trip. There
Speaker 3: is a real loss, but it's a calculated risk that,
Speaker 3: you know, given how much, given the probability of the
Speaker 3: trip being canceled, and given the high prices of trip insurance,
Speaker 3: in part because people who buy it are ones who
Speaker 3: think they trip they know that the trip is likely
Speaker 3: to be canceled. We are personal I mean, there's a
Speaker 3: right or wrong answer here, but our personal preference is
Speaker 3: that we would rather risk for going the trip than
Speaker 3: you know, adding to the cost of every trip substantially
Speaker 3: by buying this insurance. On the other hand, most of
Speaker 3: the things that we tend to ensure are things that
Speaker 3: you they're not a choice, They're not just obummer I
Speaker 3: didn't get to go on my trip. Most people don't
Speaker 3: have the luxury if their car breaks down of saying well,
Speaker 3: I just won't fix my car. They need it to
Speaker 3: get to work for example. Same with you know, a
Speaker 3: medical expense. So there, I think the way to think
Speaker 3: about it is if this is something that you really
Speaker 3: are going to have to pay for and it's not
Speaker 3: going to be possible or relatively easy to scrape together
Speaker 3: that amount of money, then that's something to really you know,
Speaker 3: to look at the pricing of course and think about,
Speaker 3: you know, what your risks are, but that's something to
Speaker 3: really consider insurance on. So again the toaster example. First
Speaker 3: of all, dare I say many of us can live
Speaker 3: without a toaster, but also, like you know, you can
Speaker 3: buy a pretty darn cheap toaster. So most of us
Speaker 3: are fortunate enough that it's annoying if our toaster breaks,
Speaker 3: but either we can decide to live without a toaster
Speaker 3: or to replace it on these.
Speaker 1: Our neighbor's toaster exactly. Well, talk about self insurance then,
Speaker 1: because to me, that's a huge part of the equation
Speaker 1: and part of what helps us drive costs down as
Speaker 1: well when it comes to the insurance market, is us
Speaker 1: having saved up more money, it allows us to, for instance,
Speaker 1: increase ourd deductible. I found that out the hard way recently,
Speaker 1: as literally a tree fell through my roof amy and
Speaker 1: we're talking about a fifty thousand dollars plus repair. I
Speaker 1: have the super high percentage deductible. It's I'm in for
Speaker 1: eighteen thousand dollars of this. But it saved me a
Speaker 1: bunch of money over the years, and hopefully, hopefully I
Speaker 1: will have an incident for many years to come and
Speaker 1: it'll continue saving money even though I have this big outlay.
Speaker 1: But how does us having more skin in the game
Speaker 1: impact what we pay for insurance?
Speaker 3: I mean, I think the more skin you're willing to
Speaker 3: have in the game, the lower or more skin you're
Speaker 3: able to have in the game, I should say, the
Speaker 3: lower a price you can get for your insurance. And
Speaker 3: let's take your homeowner's policy. So we had our own
Speaker 3: I'm sorry to hear about the tree in your house.
Speaker 3: We had our own experience, which we talk about in
Speaker 3: the book. You know, I tried. I looked far and
Speaker 3: wide for the highest homeowner's deductible we could find, which
Speaker 3: at the time was tend Shortly after we bought our
Speaker 3: home and our homeowners insurance policy, there was I don't
Speaker 3: know where you're located, but if any of your listeners
Speaker 3: are from the Northeast or from Boston in particular, the
Speaker 3: winter of twenty fifteen was record levels of snow. Everyone's
Speaker 3: house was leaking. The word ice dams was on everyone's lips,
Speaker 3: and we had, you know, major leaks and completely blew
Speaker 3: through our deductible. The next year, our boiler broke and
Speaker 3: once again we blew through our deductible. And it caused
Speaker 3: my long suffering husband to comment that it sure was
Speaker 3: expensive being married to a so called insurance expert. But
Speaker 3: and here's the silver lining for you as well. You know,
Speaker 3: he's nothing if not, you know, fair, and he actually
Speaker 3: went and calculated it. And despite those two major events
Speaker 3: in which we had to pay the full deductible. You know,
Speaker 3: we moved into our house in two thousand and nine,
Speaker 3: so we've been there a long time and there's no
Speaker 3: question that even counting those deductibles that we had to
Speaker 3: pay the substantially lower annual premiums from being willing to
Speaker 3: bear that amount of the risk. We've still come out ahead,
Speaker 3: and I suspect you would find that you had as well.
Speaker 3: So hopefully that gives you some consolation.
Speaker 1: I think it will too. Feels like a gut punch
Speaker 1: in the moment, but yeah, I have confidence in in
Speaker 1: the numbers that I've run and in the reality that
Speaker 1: hopefully you're not following a claim every year or even every.
Speaker 2: Five years petically. That's where the I mean, that's where
Speaker 2: you run the math. Yeah, you run the numbers, you
Speaker 2: do the math, and you trust the data as opposed
Speaker 2: to like a knee jerk reaction where you might make
Speaker 2: a change. And so I think it's wise that your
Speaker 2: husband also did that.
Speaker 1: Amy. So yeah, let's talk about healthcare.
Speaker 2: Health insurance here, because the best of all insurance, yeah right, obviously,
Speaker 2: so easy to navigate, so cost effective, well and specifically,
Speaker 2: like you touch on this just barely in your book,
Speaker 2: but I mean, it costs a slive of middle class
Speaker 2: Americans just like a small fortune every single year. And
Speaker 2: so with that being the case, there are some folks
Speaker 2: like Joel and I we've turned to an insurance like product,
Speaker 2: and I say insurance like because it's not insurance, it's
Speaker 2: health sharing. So because they can't technically be called insurance,
Speaker 2: one of the reasons for that is because they're not
Speaker 2: regulated in the same way. But some of these have
Speaker 2: been around for decades. What's your take on this model
Speaker 2: of healthcare sharing as opposed to actual insurance.
Speaker 3: So let me start by noting one of the things
Speaker 3: that I think is unusual, perhaps unique about health insurance
Speaker 3: compared to any other type of insurance, which goes back
Speaker 3: to something you were asking about about, you know, how
Speaker 3: can you decide what makes sense for you? People have
Speaker 3: all kinds of different incomes. Well, all of the risks
Speaker 3: we've been talking about so far, your home, your car,
Speaker 3: your trip, all of those are risks in which the
Speaker 3: amount at stake tends to increase with your income. So
Speaker 3: people who have more income have you know, tend to
Speaker 3: buy more expensive cars or more expensive homes, or go
Speaker 3: on more expensive trips, or if they want life insurance,
Speaker 3: need to ensure you know, a larger salary to you know,
Speaker 3: to cover their dependence in the event of their demise,
Speaker 3: so that there's a natural, built in process by which
Speaker 3: you know, the insurance becomes more expensive as your income
Speaker 3: goes up, because the item that you're trying to ensure
Speaker 3: is becoming more costly as your income goes up. But
Speaker 3: health is the exception to that, right, So you know,
Speaker 3: no matter your income, medical expenses, you know, the cost
Speaker 3: of treating a severe illness or roughly the same. In fact,
Speaker 3: there's also a lot of evidence that people of higher
Speaker 3: income are in better health. So if anything, it goes
Speaker 3: the wrong way that it's lower income people who have
Speaker 3: higher expected health expenditures. They certainly don't have lower ones.
Speaker 3: And so that is one of the reasons why you know,
Speaker 3: as an economist, I don't understand what it means to
Speaker 3: say I can't afford life insurance rest a short. As
Speaker 3: a human being, I understand what people mean. But you know, conceptually,
Speaker 3: you know you're you're getting some income and there's some
Speaker 3: risk you're going to lose that income, so you spend
Speaker 3: some small proportion of that income to ensure that risk.
Speaker 3: But you can literally not be able to afford your
Speaker 3: health care or your health insurance if you know the
Speaker 3: expected risk you're trying to ensure or just is just
Speaker 3: so large relative to your income you know, think about
Speaker 3: if you end up with you know, catastrophic cancer and
Speaker 3: late stage cancer and catastrophic oncology expenses, that can be
Speaker 3: hundreds of thousands of dollars. Right. So in that sense,
Speaker 3: I think one of the things we spend some time
Speaker 3: talking about the book is this is this is an
Speaker 3: example of combined with the selection problem, reason you may
Speaker 3: get government intervention in these markets. Now, the particular health
Speaker 3: sharing policies you asked about, those are designed, as you said,
Speaker 3: to avoid the heavy regulation that you know comes up
Speaker 3: in many insurance markets, which can feel a La antonin Scalia,
Speaker 3: annoying and intrusive. Often those regulations that are motivated precisely
Speaker 3: for trying to make to deal with the selection problem.
Speaker 3: That doesn't mean they always deal with it well, but
Speaker 3: that's part of the point. So I guess the question
Speaker 3: about your health sharing policy is if you've been able
Speaker 3: to create a pool of people who are all plausibly
Speaker 3: in the same boat health wise and pool your risk,
Speaker 3: that's terrific, assuming as I'm guessing you guys are relatively
Speaker 3: young and relatively healthy. If what you've done is by
Speaker 3: a policy that isn't going to pay much in the
Speaker 3: event that you get sick because it has very low
Speaker 3: maximum payouts or something. Then I'm sorry to say, you know,
Speaker 3: you haven't really solved the problem because you haven't really
Speaker 3: bought insurance. So I would have to know more about
Speaker 3: your particular policy to be able to comment on.
Speaker 1: That makes me think about kind of what Well you
Speaker 1: talk about pet insurance and there's one pet insurance product
Speaker 1: for an older dog that you say, it's like, I
Speaker 1: think it covers up to fifteen thousand dollars out of pocket,
Speaker 1: but the premiums are like eighty five hundred dollars a year,
Speaker 1: So really that it's not much insurance covers.
Speaker 3: Oh yeah, no, it's worse than that. The fine print
Speaker 3: on that is like it cover, Yeah, the premiums are
Speaker 3: something like seventy five hundred dollars a year, but you
Speaker 3: have to pay twenty percent of expenses out of pocket
Speaker 3: and their exclusions for this, that and the other thing.
Speaker 1: And so basically becomes worthless.
Speaker 3: Yes, So that's an example of where you probably shouldn't
Speaker 3: buy the policy because and why is it so expensive? Again,
Speaker 3: some of the reason is this selection or private information.
Speaker 3: And here we give another example in the book about
Speaker 3: exactly what form that you know, selection takes the example
Speaker 3: of my co author lron In av who has a
Speaker 3: dog and did not buy pet insurance in part because
Speaker 3: he looked at the prices you know, that's what we do,
Speaker 3: and saw that, you know, this was ridiculous, but also
Speaker 3: because relatedly he knew that, you know, he loved his dog,
Speaker 3: but if something happened to Shoko, he would want, you know,
Speaker 3: to put him out of his misery and and move
Speaker 3: on from there. What he didn't know until Shoko got
Speaker 3: sick is that his wife felt very differently. His wife felt,
Speaker 3: you know, no expense should be spared, no effort left
Speaker 3: undone to try to save Shoko. And he said, he
Speaker 3: talked to her, he said, come on, so what's your
Speaker 3: what's the maximum you're willing to spend and she said
Speaker 3: there is no maximum, and you know, into an economist,
Speaker 3: that's just like nuts. But anyway, unfortunately Shoko did get better.
Speaker 1: Okay, then yes, so then we'ren.
Speaker 3: Tried to buy pet insurance for Showco and he couldn't
Speaker 3: because now Shoko has a pre existing condition. It's kind
Speaker 3: of like my husband with his you know, broken down
Speaker 3: car by the side of the road. Now that you
Speaker 3: know your dog tends to get sick. It's hard to
Speaker 3: quote unquote ensure that. But more to the point, should
Speaker 3: they ever get another pet, he will certainly buy insurance
Speaker 3: because he now knows what's his prime information. It's not
Speaker 3: that this pet that he hasn't yet bought, he knows is,
Speaker 3: you know, sickly. It's that he's learned, perhaps the hard way,
Speaker 3: that he's married to someone who is willing to, you know,
Speaker 3: spend anything when a pet gets sick. And that's the
Speaker 3: kind of private information that's going to be very hard
Speaker 3: for an insurer, no matter how sophisticated their actuarial algorithms
Speaker 3: and data collection are, to be able to figure out
Speaker 3: about someone.
Speaker 2: Well, what's crazy, too, is as individuals, I think sometimes
Speaker 2: we don't even have the right information. As individuals. Sometimes
Speaker 2: we might even be blind to what we would be
Speaker 2: willing to do in that situation.
Speaker 1: Because how much we'd be willing to spend.
Speaker 2: Yeah, yeah, because I mean there might be individuals who
Speaker 2: think that, oh, well, I know what we're going to
Speaker 2: do in this instance. But I think you might even
Speaker 2: be surprised. When you are put in these kind of situations,
Speaker 2: it changes you to a certainty.
Speaker 3: So I plead completely guilty to that. Okay, I confess
Speaker 3: to having spent one hundred and fifty dollars on heroic
Speaker 3: measures for what turned out to be a dead hamster.
Speaker 3: You know, I have a nine year old daughter in tiers,
Speaker 3: you know, and apparently it took one hundred and fifty
Speaker 3: dollars for them to ascertain that the hamster was indeed dead.
Speaker 3: But you know, what are you going to do? Right?
Speaker 3: And in retrospect, it was idiotic. It was a total
Speaker 3: waste of money. I think she would now even recognize that.
Speaker 3: But in the heat of the moment, we're not sure
Speaker 3: what's going on with Jimmy, and she's sobbing, and you know,
Speaker 3: it really was quite I mean, even the people at
Speaker 3: the pet eer where tears were trickling down their face
Speaker 3: because you know, poor Jimmy and poor daughter, you know.
Speaker 2: Nine year old book.
Speaker 3: But yeah, so you don't ever really know what you're
Speaker 3: going to do till you're faced with it.
Speaker 2: But generally speaking, I mean, we can look at the
Speaker 2: data and there are some policies. Let me, so you've
Speaker 2: pointed out that pet insurance, generally speaking, is not a
Speaker 2: good policy for most folks to purchase. But when we
Speaker 2: come back from the break, I would love to hear
Speaker 2: we're going to give you the break to think about it.
Speaker 2: But some of the other policies, some of the other
Speaker 2: insurance products out there that you might tell folks to
Speaker 2: think twice about, that might that we might even steer
Speaker 2: folks away from. We'll get to that, as well as
Speaker 2: some other questions right after this.
Speaker 1: All right, we're back from the break, still talking with
Speaker 1: Amy Finkelstein about insurance. It's a funky thing, and different
Speaker 1: insurance products are funkier than other. Some are more straightforward,
Speaker 1: which makes me think Amy that sometimes the more complexity
Speaker 1: that's thrown into an insurance product, the harder it is
Speaker 1: for the consumer to understand, and oftentimes the more expensive
Speaker 1: it gets. So Matt before the break said, what insurance
Speaker 1: products would you may be curious steer clear of. Something
Speaker 1: that we talk about is like term life insurance, great option,
Speaker 1: and yet some of the other funkier versions of life
Speaker 1: insurance can cost ten to fifteen times as much and
Speaker 1: they're not necessarily offering you enough in return. So I
Speaker 1: don't know what are your thoughts on those other kinds
Speaker 1: of life insurance and just maybe other insurance products in
Speaker 1: general that you would steer people clear of.
Speaker 3: Yeah, so just to be clear, you know, before the
Speaker 3: break we were talking about how pet insurance can be,
Speaker 3: you know, very expensive relative to what you can potentially
Speaker 3: get for it. I would stop short of saying therefore
Speaker 3: you shouldn't buy it. I would more just say you
Speaker 3: should think carefully before you buy it about you know,
Speaker 3: how much could it pay out, what's the chance of
Speaker 3: that event occurring, which in part depends on what you
Speaker 3: know about your patent and also what you know about yourself.
Speaker 3: I think the kinds of insurance in general that should
Speaker 3: raise red flags even before you get to doing those
Speaker 3: calculations are the policies that seem to have caps or
Speaker 3: limits on how much they'll pay out. Because remember, the
Speaker 3: point of insurance, really, the real value is protecting against
Speaker 3: the big risks, not the small risks. So's it's backwards
Speaker 3: to have, you know, insurance that covers small things but
Speaker 3: not big things. And I think a classic example of
Speaker 3: the type of insurance that is called insurance but isn't
Speaker 3: really and that you want to be careful of is
Speaker 3: dental insurance. So I don't know if you guys have
Speaker 3: ever I hope you haven't ever had major dental issues,
Speaker 3: but if you have, excellent but if or when you do,
Speaker 3: you will discover that your so called dental insurance, I
Speaker 3: would wager, is nothing more than a bit of a
Speaker 3: pre payment plan for your routine cleanings. You know, my
Speaker 3: plan pays for you know, cleanings every six months and
Speaker 3: sort of minor stuff like cavities. But if you ever
Speaker 3: need a root canal, an expensive implant, some major dental work,
Speaker 3: you will quickly hit the cap on your insurance coverage.
Speaker 3: And our co author Ray Fisman in the book talks
Speaker 3: about his own experiences with this, which also reveal why
Speaker 3: this dental insurance is so crummy and so not what
Speaker 3: an insurance product is supposed to be. And that's because
Speaker 3: dental care, for the most part, is timable. So if
Speaker 3: you need a root canal or an implant, you don't
Speaker 3: need it. It's not like you know, when you're hit
Speaker 3: by a car, you don't need the care immediately. You
Speaker 3: need it sometime soon. And so go back to one
Speaker 3: of the ways that insurers try to prevent these selection
Speaker 3: problems through so called waiting periods. Well, you know, with
Speaker 3: most health insurance and dental insurance, there's an open enrollment
Speaker 3: in period in the fall where you can change your
Speaker 3: plan's that's like a one year waiting period, but you
Speaker 3: can wait. Dental care is timeable. And so what he
Speaker 3: did when he discovered he needed expensive implants is wait
Speaker 3: till you know the open enrollment to try and you know,
Speaker 3: increases dental insurance. And guess what he found. Dental insurance
Speaker 3: doesn't cover implants precisely because many people will do that.
Speaker 3: And there's actually, you know, rigorous research on this that
Speaker 3: we talk about in the book that an economist named
Speaker 3: Marika Cabral has done showing what happens when you, you know,
Speaker 3: make dental insurance more generous, you know, raise the caps
Speaker 3: on what will be covered, you get exactly the kind
Speaker 3: of selection problem those caps are designed to avoid.
Speaker 2: Okay, So is that the purpose essentially behind open enrollment periods,
Speaker 2: that is to essentially regulate or is it for insurers
Speaker 2: to try to regulate this selection problem?
Speaker 3: Yes, So we talked early in our conversation about the
Speaker 3: most natural response to dealing with this selection problem is
Speaker 3: to collect more information on the customer. The other thing
Speaker 3: insurance companies do, and this can explain a lot of
Speaker 3: otherwise puzzling or even maddening features of insurance products is
Speaker 3: they try to design products to attract the types of
Speaker 3: customers they want, and not attract the types of customers
Speaker 3: they don't, and waiting periods are a classic example of this. Right,
Speaker 3: a waiting period is a way to make sure. You know,
Speaker 3: my husband doesn't wait till his car breaks down to
Speaker 3: buy deluxe towing insurance. Rey Fisman doesn't wait till he
Speaker 3: needs implants to buy better dental insurance. Annual enrollment periods
Speaker 3: are a form of a waiting period. They're saying you
Speaker 3: can't change your policy within the year unless you have
Speaker 3: a so called qualifying event, something that doesn't look like
Speaker 3: I got sick, that's why I want to increase my insurance.
Speaker 3: But I had child, or I got married, or I
Speaker 3: changed jobs. So we talk in the book about various
Speaker 3: ways that insurance companies can design products to try to
Speaker 3: make them less appealing to the high cost customers. One
Speaker 3: of my favorite examples in the book is an example
Speaker 3: of the opposite of insurers trying to design the insurance
Speaker 3: to appeal to the customers they do want, and the
Speaker 3: example is from two health researchers, Cooper and Trevetti who
Speaker 3: tackle the question of I don't know if you've ever
Speaker 3: noticed this, but some health insurance plans will say that
Speaker 3: with our health insurance plan comes a discounted premium on
Speaker 3: your gym membership. So why do they do that?
Speaker 2: I think is it because it makes you healthy?
Speaker 1: Surveys right, that's there.
Speaker 3: You go, that's the natural response that you know, insurre
Speaker 3: I mean and customer incentives are aligned. They both wanted,
Speaker 3: you know, the customer to stay healthy separately. There's some
Speaker 3: excellent randomized trial work showing that. To break it to
Speaker 3: you know, firms when they offer workplace wellness plans, it's
Speaker 3: not to make it's not because it makes their employees healthier.
Speaker 3: But what workplace wellness plans do for employers and what
Speaker 3: discounted gym memberships do for health insurance sellers, is that
Speaker 3: they tend to attract the type of customers for whom
Speaker 3: this would be appealing, and those tend to be healthier,
Speaker 3: lower cost customers or healthier lower cost employees. So you know,
Speaker 3: with the example of health insurance products that bundle with
Speaker 3: it a discount on a gym membership, it's not because
Speaker 3: going to the gym is going to make you healthier
Speaker 3: in a way that will show up noticeably in your
Speaker 3: medical expenses. It's because you know, it's only the relatively healthy,
Speaker 3: relatively you know, not sick customers who can at least
Speaker 3: delude themselves into thinking that they're going to use that
Speaker 3: gym membership and go to the gym a lot. If
Speaker 3: you're already suffering from a number of build dellitating issues
Speaker 3: and illnesses, that gym membership isn't that appealing because.
Speaker 1: You know you're not attractive at whereas you.
Speaker 3: Know, the healthy among us such as my fortunately myself,
Speaker 3: can at least delude ourselves into thinking, oh, yeah, I
Speaker 3: bet I'd go to that gym. Even often we may
Speaker 3: not end up doing so well.
Speaker 1: And I think a couple of your examples that you
Speaker 1: just just gave with the dental insurance and with the
Speaker 1: pen insurance, it's a good reminder to look at the details,
Speaker 1: the specifics. What does this insurance policy pay out on?
Speaker 1: What am I required? Not just deductible wise, but like
Speaker 1: what are the limits, all that the caps, all those
Speaker 1: kind of things are really important to think about it
Speaker 1: ahead of time. Last question for you, Amy, if you
Speaker 1: were in charge, if you were like made the insurance
Speaker 1: czar of America something like that, you could make any
Speaker 1: changes or rules you wanted. You are all powerful. How
Speaker 1: would you make insurance more effective for people across the country.
Speaker 3: Okay, that is a super hard question, and I'm going
Speaker 3: to give you a fairly unsatisfying cliffhanger of an answer,
Speaker 3: which is to say that, you know, our book is
Speaker 3: about insurance markets large, pet, auto, dental, life, health, et cetera.
Speaker 3: But my own and my co author, Lauren in Know's
Speaker 3: particular area of research and specialty is health insurance. So
Speaker 3: we get asked that question all the time about if
Speaker 3: you were, you know, czar of the world, what would
Speaker 3: you do to fix US health insurance? And for a
Speaker 3: long time, our answer was that's a really hard question.
Speaker 3: We don't know the answer, That's why I study this.
Speaker 3: But at some point it became embarrassing that we didn't
Speaker 3: at least have something to say about it, and so
Speaker 3: we actually spent the last year and a half writing
Speaker 3: a separate book that is coming out this summer called
Speaker 3: We've Got You Covered, Rebooting American Healthcare. That is the
Speaker 3: answer to what we would do to fix US health.
Speaker 1: Insurance question is one of those solutions untangling healthcare from employment.
Speaker 3: I'd go with yes, there is no. There is no.
Speaker 3: The fact that health insurance in the US is so
Speaker 3: tied to employment is a perverse accident of history. It
Speaker 3: had to do with wage and price controls that came
Speaker 3: in during World War Two, and one way around that
Speaker 3: during because basically there were labor shortages and to control prices,
Speaker 3: they put in wage wage ceilings, and one way to
Speaker 3: attract employees without being able to offer them higher wages
Speaker 3: was to offer them benefits like health warre benefits, and
Speaker 3: that at some point got codified into a tax subsidy
Speaker 3: to employer provided health insurance, which is fairly i'd say
Speaker 3: uniformly reviled among by economists across the political spectrum. It's
Speaker 3: one of the few things you can get economists to
Speaker 3: agree on. There. There's only one hand. We're not two
Speaker 3: handed on that.
Speaker 2: We really do appreciate you talking to us about insurance
Speaker 2: like truly risky business. It is the most fun that
Speaker 2: you can have actually reading about insurance because you I'll
Speaker 2: give some great stories just throughout history of different markets
Speaker 2: and how they failed and how that goes into the
Speaker 2: pricing of insurance. Lew that it asks, Yeah, but where
Speaker 2: can folks find that book? Where can folks learn more
Speaker 2: about what you are up to these days?
Speaker 3: They can find it online at Amazon or any online book,
Speaker 3: Burns and Nobles. It's called risky Business, Why insurance markets
Speaker 3: fail and what to do about it? And certainly our
Speaker 3: goal was to make it fun while but hopefully also
Speaker 3: you learn something. I mean, those are my favorite books
Speaker 3: to read where you're reading something that kind of reads
Speaker 3: like fiction but it's actually nonfiction. I don't know if
Speaker 3: we achieved that, but that was certainly our.
Speaker 1: Goal, almost like the Malcolm Gladwell model, right, he's so
Speaker 1: good at that. Absolutely rightly, Well, I think he achieved it. Amy,
Speaker 1: Thank you again so much for joining us today. We
Speaker 1: really appreciate it.
Speaker 3: Thank you so much for having me well.
Speaker 2: Amy, thanks again for speaking with us. All right, Joel
Speaker 2: so spoken like a true economist.
Speaker 3: Amy.
Speaker 2: She was saying, like, on one hand, this, on the
Speaker 2: other hand, not a nuance, Right, Well, there is, And
Speaker 2: I guess I'll go ahead and give my my big
Speaker 2: takeaway from this episode. We are trying to get her
Speaker 2: to kind of out maybe some specific insurance products and
Speaker 2: whether or not that we should completely avoid those. But
Speaker 2: what it came down to, what Amy pointed us to
Speaker 2: is essentially what we need to do is look at
Speaker 2: the fine print and to determine for ourselves whether or
Speaker 2: not any insurance product that's out there if it makes
Speaker 2: sense given our financial situation. Given that's that select that
Speaker 2: problem of selection, right, Like, we have the information that
Speaker 2: we know is going to lead to us either using
Speaker 2: insurance or not using insurance, and so we have to
Speaker 2: make the best informed decisions based on what it is
Speaker 2: that we know. But a part of that is, like
Speaker 2: she said, looking at some of those maximums that insurance
Speaker 2: companies are willing to pay on whatever issue it is
Speaker 2: it is that come that comes up. And so just
Speaker 2: like and you kind of hinted at this as well,
Speaker 2: but making sure to read the fine print, make sure
Speaker 2: you know what those maximums are, making sure that you
Speaker 2: know what you're out of pocket maximums are.
Speaker 3: Going to be.
Speaker 1: But what are you actually getting, what are you actually
Speaker 1: you're actually getting, and how much you're gonna have to
Speaker 1: pay not just in premiums every year, but also when
Speaker 1: that event does occur, because in that way, it is
Speaker 1: a math problem.
Speaker 2: Just like she said, with her homeowners insurance. Her husband
Speaker 2: did the math and turns out they still came out
Speaker 2: ahead even though they two years in a row they
Speaker 2: hit their very expensive deductible. So that's my big takeaway.
Speaker 1: Yeah, how about you, though, well you got Yeah, you've
Speaker 1: got to be careful. I think when she said protecting
Speaker 1: against the big risks, that's kind of what you need
Speaker 1: to focus on. You can't de risk everything. And there
Speaker 1: is kind of like an insurance product available for almost
Speaker 1: everything under the sun. It feels like, whether you're buying
Speaker 1: that laptop, you're getting extended warranty, whether you are buying
Speaker 1: a flight, and American Airlines or Delta United says, hey,
Speaker 1: guess what for ten percent of the cost of this
Speaker 1: of this ticket, you too can insure. Again, it's not
Speaker 1: making it on your flight. And there are all sorts
Speaker 1: of insurance products that we can buy these days. But
Speaker 1: if it's something you can stomach, then I think it's
Speaker 1: something you should self insure on and that is going
Speaker 1: to save you money in the long run. And so
Speaker 1: some insurance products are better than others, and the big
Speaker 1: things are Yeah, if you die prematurely, I think your home,
Speaker 1: your car is even one of those things. But but
Speaker 1: your car, depending on how old it is and what
Speaker 1: sort of condition it's in. It's something you can self
Speaker 1: insuran more than maybe you currently are exactly I'm raising
Speaker 1: you're deductible and having more money in the bank. Yeah,
Speaker 1: and having reduced amounts of coverage which required their buyer's state.
Speaker 2: But uh yeah, nice man. All right, Let's get to
Speaker 2: the beer that you and I enjoyed during this episode.
Speaker 2: This was a kon Tiki and not surprisingly, this was
Speaker 2: a tropical triple ipa by Los Angeles ale Works. What
Speaker 2: were your thoughts on this one?
Speaker 1: Okay, So part of the reason I picked this beer
Speaker 1: up when I was in Los Angeles and I brought
Speaker 1: it back here for us to consume is because the
Speaker 1: Kantiki it was actually a ship made by a Norwegian
Speaker 1: and he crossed the entire ocean on this this tiki,
Speaker 1: this tiki ship essentially back in nineteen forty seven. His name,
Speaker 1: by the way, oh really thor haired All what like,
Speaker 1: what a super awesome Norwegian name. So, since I am
Speaker 1: more of Norwegian heritage and I actually went to the
Speaker 1: kon Tiki Museum when I was in Norway back in
Speaker 1: the day, I figured we had to give a beer
Speaker 1: a shot. Oh that's crazy.
Speaker 2: So, like you see kon tiki, and especially the way
Speaker 2: it's written on the label, it makes you think of
Speaker 2: like a tiki hut, I know. And so I guess
Speaker 2: I don't get this tiki just mean like it's made
Speaker 2: something made from like bamboo.
Speaker 1: I think. So that's my guess, okay, but.
Speaker 2: Which we normally associate with tropical climates like in Hawaii. Yeah,
Speaker 2: but I guess bamboo grows in Norway as well. I
Speaker 2: don't know. I think.
Speaker 1: So he went all the way across the ocean, all
Speaker 1: the way up to South America and on his homemade raft,
Speaker 1: and then I don't know if he made another one
Speaker 1: while he was down there. I forget. But this guy,
Speaker 1: they've got like koonyaks named after him and stuff now
Speaker 1: because he's like a folk legend and or nice. But
Speaker 1: this beer I thought was was great. It was really fruit.
Speaker 1: He had big mango vibes going on, and it was
Speaker 1: kind of sweet because it was a triple ipa as well.
Speaker 2: So yeah, mango. It definitely picked up on that, like
Speaker 2: passion fruits like different some of the different stone fruits
Speaker 2: out there, but it certainly had some of those tropical
Speaker 2: fruit flavors going on, and it may me feel like
Speaker 2: I was more hanging out in Hawaii than Norway myself,
Speaker 2: but talking to insurance while stipping from a coconut or
Speaker 2: something exactly. But yeah, so this again was Kantiki Triple
Speaker 2: I p A from la Al Works. But that's gonna
Speaker 2: be it for this episode. Listeners can find links up
Speaker 2: in our show notes up on the website at how
Speaker 2: tomoney dot com, including not only a link to Risky
Speaker 2: Business Amy's current book, but we'll we'll have a link
Speaker 2: up there as well for the one that is set
Speaker 2: to come out later this summer. Yeah, you can find
Speaker 2: that at how to money dot com. But Joel, that's
Speaker 2: gonna be a buddy until next time. Best Friends Out,
Speaker 2: Best Friends Out.