WEBVTT - Why Is Insurance So Funky? with Amy Finkelstein #691 0:00:00.160 --> 0:00:03.120 Welcome to How to Money. I'm Joel and I am 0:00:03.320 --> 0:00:05.880 mat and today we're talking about why insurance is so 0:00:06.040 --> 0:00:07.920 funky with Amy Finkelstein. 0:00:27.480 --> 0:00:30.640 That's right, purchasing and insurance policy. Honestly, it's one of 0:00:30.680 --> 0:00:34.360 those seemingly boring tasks that a companies entering adulthood. 0:00:34.600 --> 0:00:36.199 And so whether it was like. 0:00:36.159 --> 0:00:38.320 Your parents just making you chip in on the higher 0:00:38.360 --> 0:00:41.640 costs of car insurance because you were a teenage driver, 0:00:42.120 --> 0:00:44.880 or maybe seeing the health insurance deduction come out of 0:00:44.920 --> 0:00:47.200 your paycheck every two weeks that line item, or maybe 0:00:47.200 --> 0:00:49.599 you're at the point now too where you've realized it's 0:00:49.600 --> 0:00:51.559 time to get a life insurance policy because you have 0:00:51.600 --> 0:00:54.640 folks who are dependent on your income. Either way, it's 0:00:54.760 --> 0:00:58.760 typically adult task to get insurance, and we just file 0:00:58.800 --> 0:01:01.720 it away, you know, those documents like we either save 0:01:01.760 --> 0:01:03.840 them on a folder on our computer, we follow them 0:01:03.880 --> 0:01:08.000 away without giving them much thought. But our guest, Amy Finkelstein, 0:01:08.240 --> 0:01:11.840 who is a distinguished Professor of Economics at MIT, she 0:01:12.000 --> 0:01:16.000 is here today to explain why insurance is actually fascinating. 0:01:16.319 --> 0:01:19.080 She writes about this along with her co authors in 0:01:19.120 --> 0:01:21.920 her new book Risky Business, and she writes just how 0:01:22.000 --> 0:01:24.120 understanding the insurance market, how it can help us to 0:01:24.160 --> 0:01:27.720 understand why it's so expensive, what types of policies out 0:01:27.720 --> 0:01:30.240 there are just terrible, and even what steps we can 0:01:30.319 --> 0:01:34.440 do to reduce the cost of insurance in our own lives. Amy, 0:01:34.480 --> 0:01:36.479 thank you so much for joining us today on the podcast. 0:01:36.800 --> 0:01:38.240 Thanks so much for having me here. 0:01:38.680 --> 0:01:40.679 Glad to have you. Amy. The first question that we 0:01:40.720 --> 0:01:42.640 ask everyone who comes on the show is what they 0:01:42.680 --> 0:01:44.920 like to splur John, Matt and I were drinking a 0:01:44.959 --> 0:01:48.200 delicious triple ipa right now, and so that's something that 0:01:48.240 --> 0:01:50.560 we spend some would say too much money on, but 0:01:50.600 --> 0:01:52.840 we're still being smart, saving and investing for the future. 0:01:53.080 --> 0:01:55.160 What is that thing you like to splor John in 0:01:55.160 --> 0:01:55.720 your life. 0:01:56.200 --> 0:01:59.720 That's a great question. I'd say the thing I spend 0:02:00.160 --> 0:02:02.160 too much money on. It's not to say I spend 0:02:02.240 --> 0:02:04.320 very much of it at all, but any amount is 0:02:04.360 --> 0:02:07.800 too much. Is you know those like candy stores that 0:02:07.920 --> 0:02:11.399 have like the glass jars full of candies you pay 0:02:11.440 --> 0:02:15.320 by the pound or whatever. I just love going in 0:02:15.360 --> 0:02:18.480 there and like scourging on some like M and MS, 0:02:18.600 --> 0:02:21.000 and it drives my husband nuts. He's like, literally, you 0:02:21.040 --> 0:02:23.200 could just go to the convenience store and buy a 0:02:23.240 --> 0:02:25.000 pack of EM and MS, and it would be so much. 0:02:25.320 --> 0:02:28.520 There's something about the act of, you know, getting it 0:02:28.560 --> 0:02:31.400 from those glass jars, scooping them out of the big bin, 0:02:31.880 --> 0:02:34.000 putting them in my paper bag, and eating them from 0:02:34.040 --> 0:02:37.320 that bag rather than from the pack, and the convenience. 0:02:37.440 --> 0:02:39.240 It's like a sensory experience. Isn't like that? 0:02:39.320 --> 0:02:40.960 Is it? Because I feel like that's the old school 0:02:41.000 --> 0:02:44.680 way of getting candies. Does it harken back to a 0:02:44.720 --> 0:02:48.520 life that we no longer childhood no longer exists. 0:02:48.200 --> 0:02:52.840 Or I'm that old? But thanks for the thought. I 0:02:52.880 --> 0:02:55.400 don't know that. I think initially it just was like 0:02:55.520 --> 0:02:57.320 I was in there, and you know, I like it. 0:02:57.360 --> 0:02:59.680 There's something about the feeling, the sensory experience, and now 0:02:59.720 --> 0:03:03.520 it's the fact that it is literally a waste of money. 0:03:03.720 --> 0:03:07.000 They're a very small waste of money, but sometimes it 0:03:07.120 --> 0:03:09.720 just feels a little bit rebellious and a little bit 0:03:09.880 --> 0:03:11.800 you know, decadent. Yeah, to do it. 0:03:11.840 --> 0:03:14.239 I love it. No, I think that's the coolest thing ever, because, 0:03:14.280 --> 0:03:16.520 like like your husband says, you could you could go 0:03:16.520 --> 0:03:18.360 to Costco and buy like a five pound bag of 0:03:18.400 --> 0:03:20.880 it for absolutely nothing, But for you to go into 0:03:20.880 --> 0:03:23.000 that candy store. There's yeah, there's a there's an entire 0:03:23.040 --> 0:03:26.440 experience associated with that. And I say more parad I 0:03:26.520 --> 0:03:28.280 like that, this is what you do with your rebellius streak. 0:03:28.320 --> 0:03:30.720 You don't go out there and get tattoos or like, 0:03:31.320 --> 0:03:33.320 this is how you live that out. 0:03:33.440 --> 0:03:35.760 I mean, you know, I'm an economics professor. There's a 0:03:35.880 --> 0:03:38.760 limits to Bellian looks. 0:03:38.560 --> 0:03:43.240 Like right, Amy, Okay, let's let's get into insurance. How 0:03:43.600 --> 0:03:47.840 is it that insurance differs from broccoli specifically? And then 0:03:48.000 --> 0:03:50.160 how did broccoli And it's sort of a roundabout way 0:03:50.560 --> 0:03:52.240 cause you to write this book? 0:03:52.440 --> 0:03:54.920 Well, thank you so much for asking that question, because 0:03:54.960 --> 0:03:58.520 we my co authors Lauren and iv and Ray Fisman 0:03:58.600 --> 0:04:02.840 and I actually somewhat jokingly, somewhat seriously thought of titling 0:04:02.880 --> 0:04:07.680 the book why is Insurance different from broccoli? Except that 0:04:07.800 --> 0:04:10.840 we decided that putting two things no one likes in 0:04:10.880 --> 0:04:13.760 your title is probably worse than just one. 0:04:14.320 --> 0:04:18.440 The publisher was like, no, you guys can't exactly. 0:04:18.000 --> 0:04:22.320 But to tell you the origins of that question, it 0:04:22.400 --> 0:04:28.360 actually goes back to twenty twelve, during the Supreme Court's 0:04:28.400 --> 0:04:32.960 hearing of oral arguments about whether the mandate in the 0:04:33.000 --> 0:04:36.400 Affordable Care Act otherwise known as Obamacare, that everyone had 0:04:36.440 --> 0:04:40.120 to buy health insurance, whether that was constitutional, whether you 0:04:40.120 --> 0:04:43.440 could mandate that as the Act did, that everyone had 0:04:43.480 --> 0:04:46.520 to buy health insurance. And at the risk of stating 0:04:46.560 --> 0:04:49.320 the obvious, I and I presume my co authors, so 0:04:49.360 --> 0:04:52.080 I won't implicate them. I know nothing about the law 0:04:52.320 --> 0:04:56.400 or constitutional law. So we were just interested because we're 0:04:56.440 --> 0:05:01.240 interested in policy, and particularly policy around insurance. And so 0:05:01.560 --> 0:05:06.440 it was somewhat startling to hear then Supreme Court Justice 0:05:06.480 --> 0:05:12.360 Antonin Scalia, during oral arguments, ask the question, well, if 0:05:12.440 --> 0:05:15.920 the government can mandate that people buy health insurance, can 0:05:15.960 --> 0:05:20.400 it also mandate that people buy broccoli or eat their broccoli. Now, 0:05:20.440 --> 0:05:24.719 obviously he was making a rhetorical point, trying to conjure 0:05:24.800 --> 0:05:28.560 up the image of a you know, intrusive state. And 0:05:28.640 --> 0:05:31.839 I would warrant that, you know, he's a very smart man, 0:05:31.960 --> 0:05:34.400 or he was before he passed away. I'm sure he 0:05:34.480 --> 0:05:37.600 knows the difference between insurance and broccoli. But the fact 0:05:37.680 --> 0:05:41.279 that he could even score rhetorical points on that question 0:05:41.400 --> 0:05:45.080 made us, as insurance afficionados or insurance geeks, you know, 0:05:45.200 --> 0:05:47.960 sort of sit up and take note that you know 0:05:48.640 --> 0:05:52.280 that if a Supreme Court justice could ask that question, 0:05:52.480 --> 0:05:54.200 we dare say, there are a lot of people in 0:05:54.240 --> 0:05:57.599 the world that don't understand what we see as the 0:05:57.680 --> 0:06:01.240 fundamental difference between insurance, and so I'll let you know 0:06:01.279 --> 0:06:04.599 what it is. It's actually quite simple, but it's very important. 0:06:05.400 --> 0:06:09.880 It's that the supermarket doesn't care who buys its broccoli. 0:06:10.120 --> 0:06:12.919 The costs to the supermarket of purchasing the broccoli and 0:06:12.960 --> 0:06:16.360 reselling it are the same no matter which customer buys it. 0:06:16.400 --> 0:06:20.000 But your insurer cares a great deal about who they 0:06:20.080 --> 0:06:24.240 sell insurance to. And that's because insurance is an example 0:06:24.279 --> 0:06:27.920 of what economists call a selection market. Labor markets are 0:06:27.920 --> 0:06:32.000 another example, credit cards, certain types of education in which 0:06:32.480 --> 0:06:37.800 the profits of the organization selling the product depend not 0:06:37.839 --> 0:06:40.880 only on how much they sell, like in any market, 0:06:40.880 --> 0:06:44.920 including the market for broccoli, but also on who they 0:06:44.960 --> 0:06:49.320 sell to. So if you're a auto insurer and you 0:06:49.440 --> 0:06:54.360 sell to a accident prone, risky, reckless driver, it's going 0:06:54.400 --> 0:06:56.800 to cost you more in claims you have to pay 0:06:56.800 --> 0:07:00.359 out than if you sell to a boring safety you know, 0:07:00.480 --> 0:07:04.760 middle aged woman like myself, who you know, inches along 0:07:04.800 --> 0:07:09.560 in her car, writes. Actually, as we talk about in 0:07:09.600 --> 0:07:11.600 the book not to have any spoilers. I'm separately a 0:07:11.720 --> 0:07:15.080 terrible driver, But that's an example of private information we'll 0:07:15.080 --> 0:07:18.400 get into and so and so. Why is that a problem. 0:07:18.840 --> 0:07:23.520 It's because if if the insurance company doesn't know if 0:07:23.520 --> 0:07:26.440 you're a good driver or a bad driver, and it 0:07:26.520 --> 0:07:29.240 sets its price based on sort of a typical accident rate, 0:07:29.320 --> 0:07:33.480 maybe for someone of your basic demographics, who's going to 0:07:33.520 --> 0:07:38.280 find that product particularly appealing. Well, the ones who know that, 0:07:38.360 --> 0:07:41.000 they tend to get into a lot of fender benders 0:07:41.080 --> 0:07:42.560 or worse, and they're going to have a lot of 0:07:43.400 --> 0:07:46.160 claims on their uh, make a lot of claims on 0:07:46.200 --> 0:07:49.520 their policies. So what that's going to do is increase 0:07:49.800 --> 0:07:53.080 the costs to the insurance company of providing that insurance, 0:07:53.520 --> 0:07:56.200 and they're going to have to raise their price. And 0:07:56.320 --> 0:07:59.760 that is a real problem because then the safe driver, 0:08:00.240 --> 0:08:03.480 the ones who tend to have very few accidents, are 0:08:03.480 --> 0:08:06.200 going to be faced with having to pay a ridiculously 0:08:06.280 --> 0:08:09.720 high price for their automobile insurance. And the reason that's 0:08:09.720 --> 0:08:12.600 a problem is because I think the fundamental misconception about 0:08:12.640 --> 0:08:17.600 insurance is it's about reducing risk, So you want it 0:08:17.640 --> 0:08:21.480 whether you're safe or like myself a rather terrible driver, 0:08:21.920 --> 0:08:24.520 because everyone, no matter how careful they are, can be 0:08:24.640 --> 0:08:27.200 unfortunate enough to get into an auto accident. No matter 0:08:27.200 --> 0:08:29.240 how healthy they are, they can have a medical expense, 0:08:29.480 --> 0:08:34.040 et cetera, et cetera. So the promise, dare I say, 0:08:34.040 --> 0:08:37.160 the excitement of insurance is it can help each and 0:08:37.200 --> 0:08:40.840 every one of us achieve some measure of peace and 0:08:40.880 --> 0:08:46.199 security in an uncertain and dangerous world. And the problem 0:08:46.280 --> 0:08:49.000 is when there's this selection problem that people know more 0:08:49.040 --> 0:08:51.920 than the insurance company knows about how likely they are 0:08:51.960 --> 0:08:53.680 to have claims, it can go in and ruin the 0:08:53.720 --> 0:08:54.640 market for everyone. 0:08:54.960 --> 0:08:56.360 I just want to say, first off, you're getting me 0:08:56.400 --> 0:08:59.800 pumped up. Get your enthusiasm is contagious. It am getting 0:09:00.120 --> 0:09:00.840 about insurance. 0:09:01.320 --> 0:09:03.360 I'm going to go ahead and apologize for calling insurance 0:09:03.360 --> 0:09:05.520 boring from early on, Amy. 0:09:05.600 --> 0:09:06.440 Thank you very much. 0:09:06.520 --> 0:09:08.240 That means a lot. 0:09:08.440 --> 0:09:12.120 Right, Well, talk to us about how insurance rates are determined, Amy, 0:09:12.120 --> 0:09:14.559 because for instance, you say in your book that all 0:09:14.559 --> 0:09:17.200 State had like three pricing tiers back in the day. 0:09:17.800 --> 0:09:20.920 It was kind of basic in how you chose the 0:09:21.000 --> 0:09:25.200 sort of driver's insurance, the auto insurance that you that 0:09:25.240 --> 0:09:28.520 you had. Now they have like fifteen hundred tiers. Why 0:09:28.600 --> 0:09:30.480 is it so complicated? Why has it gotten so much 0:09:30.480 --> 0:09:31.600 more complex over the years. 0:09:32.440 --> 0:09:35.440 So that's a great question if you start with the 0:09:35.520 --> 0:09:38.600 problem being the one I described it. Insurance is something 0:09:38.640 --> 0:09:42.520 that can benefit everyone, the high risk and the low risk. 0:09:42.840 --> 0:09:46.679 But that if customers know more about how likely they 0:09:46.679 --> 0:09:49.280 are to have accidents or claims, and the insurance company 0:09:49.320 --> 0:09:53.120 knows the high cost, customers are likely to flood the market, 0:09:53.400 --> 0:09:57.160 driving up prices and making the product worse for everyone. 0:09:57.240 --> 0:09:59.560 And sometimes in extreme cases, as we talk about in 0:09:59.559 --> 0:10:02.000 the book, examples of markets that can be made to 0:10:02.040 --> 0:10:04.800 completely disappear. Then these can be hard to think of 0:10:05.120 --> 0:10:07.520 because they don't exist, so you're not confronted with them. 0:10:07.600 --> 0:10:11.320 But we give examples in the book, like the market 0:10:11.400 --> 0:10:15.000 for layoff insurance if you lose your job, or the 0:10:15.040 --> 0:10:20.040 market for divorce insurance, which actually some entrepreneur tried to 0:10:20.080 --> 0:10:23.120 offer and guess guess what they found that you know 0:10:23.160 --> 0:10:28.120 who tended to buy those policies. Anyways, exactly if you 0:10:28.160 --> 0:10:30.520 didn't already dislike your spouse, hearing that he just bought 0:10:30.600 --> 0:10:34.680 divorce insurance, might might be might be the extraw that 0:10:34.720 --> 0:10:40.719 broke the camera but but so, of course, not all 0:10:40.800 --> 0:10:44.440 insurance insurance markets do exist. You can buy automobile insurance, 0:10:44.480 --> 0:10:47.360 life insurance, pet insurance, many examples that we talk about 0:10:47.400 --> 0:10:51.199 on the book, and part of the way that those 0:10:51.240 --> 0:10:57.559 markets function or function partially is precisely because insurers try 0:10:57.600 --> 0:11:02.359 to undo the informational advantage of the customer by collecting 0:11:02.440 --> 0:11:06.360 all kinds of information about them. So if you've ever 0:11:06.760 --> 0:11:09.880 filled out an automobile insurance application, or if you're as 0:11:09.960 --> 0:11:12.000 crazy as us and you do it just for fun 0:11:12.120 --> 0:11:15.240 or as part of research and writing this book, you'll 0:11:15.280 --> 0:11:18.160 find that they ask not only a bunch of I think, 0:11:18.240 --> 0:11:22.160 pretty natural and straightforward questions such as how long have 0:11:22.240 --> 0:11:25.840 you had your license, how many accidents have you had 0:11:26.360 --> 0:11:28.920 with the make and model of your car, et cetera, 0:11:29.320 --> 0:11:31.679 but they also ask a bunch of questions that might 0:11:31.720 --> 0:11:35.640 seem very odd, Like they ask about your credit score, 0:11:35.760 --> 0:11:39.640 they ask about your marital status, they ask about your GPA. 0:11:39.760 --> 0:11:42.400 We were kind of excited about that one, since we're professors, 0:11:44.080 --> 0:11:46.200 and so why are they doing that. It's because it 0:11:46.360 --> 0:11:50.240 turns out that actuaries who've spent some time playing with 0:11:50.360 --> 0:11:53.760 large amounts of data on people who buy automobile insurance 0:11:53.800 --> 0:11:56.240 have found that, you know, it turns out people with 0:11:56.320 --> 0:12:00.520 higher grades tend to be safer drivers. Not everyone, but 0:12:00.720 --> 0:12:06.480 you know, on average, marital status is a predictor of accidents, 0:12:06.480 --> 0:12:06.959 et cetera. 0:12:07.280 --> 0:12:09.199 What about whether or not you have divorce insurance? 0:12:09.240 --> 0:12:12.240 Is that that I don't know. But so they ask 0:12:12.320 --> 0:12:16.400 all these questions to try to equalize the playing field, 0:12:16.440 --> 0:12:18.160 as it were, level the playing field so that the 0:12:18.160 --> 0:12:21.760 market can function. And one of the things that we 0:12:21.800 --> 0:12:24.440 talked about in the book that we at least found 0:12:24.520 --> 0:12:27.400 pretty surprising is, you know, we start with the history 0:12:27.480 --> 0:12:31.080 of life insurance in the time of ancient Rome, and 0:12:31.120 --> 0:12:34.040 perhaps it's not surprising then that when they weren't even 0:12:34.080 --> 0:12:37.400 pricing based on age, you know, customers were able to 0:12:37.920 --> 0:12:41.760 you know, game the market. But even today, in the 0:12:41.800 --> 0:12:45.080 information age and the you know, in the age of 0:12:45.240 --> 0:12:50.079 big data, it still turns out that not first time drivers, 0:12:50.120 --> 0:12:52.040 but you know, once you've been a driver for a 0:12:52.080 --> 0:12:55.440 couple of years, it turns out you still know more 0:12:55.679 --> 0:12:59.840 about your risk, your likelihood of having an accident than 0:13:00.320 --> 0:13:03.040 what the insurance company can figure out even with all 0:13:03.080 --> 0:13:06.440 these detailed questions, So you still get the problems that 0:13:06.559 --> 0:13:12.240 selection causes which are either non existent insurance or very 0:13:12.280 --> 0:13:16.000 expensive insurance, or insurance with all kinds of clauses and 0:13:16.080 --> 0:13:19.520 fine print and waiting periods, all designed to try to 0:13:19.559 --> 0:13:21.839 combat these these selection problems. 0:13:22.480 --> 0:13:24.920 And this makes sense that the different companies out there, 0:13:24.920 --> 0:13:28.120 So we're talking about car insurance, auto insurance, So using 0:13:28.120 --> 0:13:30.880 that as an example, like there are different companies, different 0:13:30.880 --> 0:13:33.720 providers out there that want to track your driving for instance, 0:13:33.760 --> 0:13:36.880 Like that is a piece of data that they want 0:13:36.880 --> 0:13:38.480 to know. They want to know how often you drive 0:13:38.520 --> 0:13:41.280 at night, how quickly you accelerate, how quickly you stop 0:13:41.360 --> 0:13:45.640 with the accelerometers that are built into your phone. And 0:13:45.679 --> 0:13:48.160 so that makes sense. And I'm curious what you think 0:13:48.200 --> 0:13:50.280 our response to that should be. I mean, should it 0:13:50.280 --> 0:13:52.280 be to say, yeah, all right, let's let's give you 0:13:52.320 --> 0:13:54.120 all the information possible in order to make this a 0:13:54.160 --> 0:13:57.480 more efficient market, or do you see that being a 0:13:57.520 --> 0:14:00.920 problem just from like essentially from a privacy certain standpoint. 0:14:01.679 --> 0:14:03.760 It's a great question, and I'm going to give the 0:14:03.960 --> 0:14:10.320 annoying economist answer. So President Truman apparently famously equipped that 0:14:10.400 --> 0:14:13.560 he wished he could find a one handed economic advisor 0:14:13.559 --> 0:14:16.960 because his economist advisors were always saying on the one hand, this, 0:14:17.200 --> 0:14:20.400 on the other hand, that so and in the book, 0:14:20.440 --> 0:14:22.680 I think we're very upfront from the beginning that if 0:14:22.680 --> 0:14:26.440 you're looking for simple solutions and clear, you know, clear 0:14:26.480 --> 0:14:28.480 ways forward. That's for the most part, we have a 0:14:28.480 --> 0:14:30.440 couple of things that we think are very obvious, and 0:14:30.480 --> 0:14:32.640 every war should be obvious to everyone. But for the 0:14:32.640 --> 0:14:35.440 most part, our goal is not to say, well, this 0:14:35.560 --> 0:14:37.440 is the right way to think about it, but to 0:14:37.520 --> 0:14:40.840 lay out the trade offs. And in the example you gave, 0:14:41.240 --> 0:14:45.240 you know, the the pro side of letting insurers collect 0:14:45.280 --> 0:14:47.960 as much information as they want and price on as 0:14:48.040 --> 0:14:51.880 much information as they can is precisely what you were 0:14:51.880 --> 0:14:55.280 alluding to help make the market work better. There are 0:14:55.360 --> 0:14:59.080 two very important drawbacks that have to be weighed against. 0:14:59.120 --> 0:15:02.400 That one is the one that you already alluded to, 0:15:02.480 --> 0:15:05.960 which is notions of privacy. Right, at some point, maybe 0:15:05.960 --> 0:15:08.640 it's just creepy to have to know that your automobile 0:15:08.680 --> 0:15:12.840 insurance company is tracking you on your phone, and you know, 0:15:12.920 --> 0:15:15.240 I know my teenagers think it's creepy that I can 0:15:15.280 --> 0:15:18.000 track them. You know, how much creepier to know that 0:15:18.040 --> 0:15:21.520 my insurer is also knowing where I am? Although perhaps 0:15:21.560 --> 0:15:27.760 they'd prefer that. But the other issue is something that 0:15:27.800 --> 0:15:30.400 relates to the question of what it is we're trying 0:15:30.440 --> 0:15:34.200 to ensure. So if you price on all the predictors 0:15:34.200 --> 0:15:37.840 of risk, then you get rid of the issue of 0:15:37.880 --> 0:15:41.440 private information and selection at a point in time, But 0:15:41.880 --> 0:15:46.280 in doing so, you destroy the market for insurance against 0:15:46.320 --> 0:15:48.640 being the type of person who's a high risk. So 0:15:49.040 --> 0:15:51.000 a sort of silly example we give in the book 0:15:51.080 --> 0:15:53.320 is it's not my fault that I'm a bad driver? 0:15:53.520 --> 0:15:55.320 Why can't I Why should I have to pay more 0:15:55.360 --> 0:16:00.160 for insurance? I was born incompetent. A slightly more there 0:16:00.200 --> 0:16:02.360 is or a much more serious example, you know, when 0:16:02.360 --> 0:16:05.080 it gets into issues of whether insurance should be able 0:16:05.120 --> 0:16:08.960 to price health and life insurance differently for people who 0:16:09.040 --> 0:16:12.360 have a elevated risk of some genetic disease a breast 0:16:12.400 --> 0:16:15.760 cancer gene for example. So on the one hand, if 0:16:15.760 --> 0:16:18.360 they're not allowed to, that means that people who know 0:16:18.440 --> 0:16:20.440 they have a family history that puts them at risk 0:16:20.520 --> 0:16:23.720 for this think they're on average more likely to have 0:16:23.800 --> 0:16:27.040 medical expenses and are going to buy insurance, driving up 0:16:27.040 --> 0:16:29.560 the price for everyone. On the other hand, if they're 0:16:29.640 --> 0:16:32.160 not allowed to price insurance based on this, you're going 0:16:32.200 --> 0:16:34.280 to get that selection problem. On the other hand, if 0:16:34.320 --> 0:16:37.840 they are, then then you know, sort of before we're born, 0:16:38.000 --> 0:16:40.640 or behind the veil of ignorance, as it were, there's 0:16:40.680 --> 0:16:45.040 no insurance against being unfortunate enough to be at elevated 0:16:45.120 --> 0:16:49.160 risk for certain diseases. And we give one example of 0:16:49.240 --> 0:16:51.400 how this played out. I think we could all agree 0:16:51.520 --> 0:16:56.440 quite badly in the sense that in New York and 0:16:56.480 --> 0:17:00.400 New Jersey in the nineteen nineties, in the small group 0:17:00.440 --> 0:17:03.320 health insurance markets, so not the employer provided market, but 0:17:03.720 --> 0:17:07.440 the market for people who don't have employer provided health insurance, 0:17:08.200 --> 0:17:11.240 both states, at different points decided that it was not 0:17:11.400 --> 0:17:16.280 fair to charge people different prices for sort of more 0:17:16.320 --> 0:17:20.359 generous coverage based on their age, or their gender, or 0:17:20.440 --> 0:17:24.160 their pre existing health conditions. So they outlawed that. They 0:17:24.200 --> 0:17:28.000 imposed what's called community rating, which means everyone in the 0:17:28.000 --> 0:17:32.160 community has to be offered the same price for insurance 0:17:32.200 --> 0:17:35.400 and also guaranteed issue you can't refuse to serve some customers. 0:17:35.400 --> 0:17:38.159 And this was done, we believe in the out of 0:17:38.440 --> 0:17:42.280 a fairness or equity goal. What ended up happening is 0:17:42.320 --> 0:17:47.199 the market for this more comprehensive insurance unraveled completely and 0:17:47.240 --> 0:17:51.800 got destroyed because when you set the price, when you're 0:17:51.840 --> 0:17:53.920 allowed to price based on anything, the people who are 0:17:53.960 --> 0:17:55.639 more likely to find that a good deal are the 0:17:55.640 --> 0:17:58.760 ones who already know they have some pre existing condition, 0:17:59.040 --> 0:18:01.639 or they're older, are going to have more medical expenses. 0:18:02.080 --> 0:18:04.880 And so the result was there was a classic death spiral. 0:18:06.040 --> 0:18:08.880 Claims kept going up, so the insurer kept raising prices, 0:18:08.920 --> 0:18:11.439 so the people who stayed in were even sicker, and 0:18:11.480 --> 0:18:14.639 on and on it went till the market essentially collapsed completely. 0:18:14.760 --> 0:18:16.399 And so we sort of say, on the one hand, 0:18:17.000 --> 0:18:22.520 that's fair, everyone faces the same terrible situation of no insurance. 0:18:22.520 --> 0:18:24.520 But it was a sort of beggar thy neighbor fairer 0:18:24.600 --> 0:18:27.920 where we made everyone worse off in the interests of fairness, 0:18:28.000 --> 0:18:30.040 and that, at least to us, seemed a little extreme. 0:18:30.600 --> 0:18:32.680 Yeah, it's kind of like the American Airlines All you 0:18:32.680 --> 0:18:36.040 Can Fly Misshap story the detail or early in the 0:18:36.080 --> 0:18:38.720 book as well, which is just a fascinating read. And 0:18:38.880 --> 0:18:41.680 we actually want to talk more about healthcare, health insurance, 0:18:42.040 --> 0:18:44.600 how messed up that is, and along with some other 0:18:44.680 --> 0:18:47.560 questions we have for you Amy about insurance. We'll get 0:18:47.560 --> 0:18:48.760 to those right after this. 0:18:58.359 --> 0:19:01.080 We are back and we're talking about insurance with Amy 0:19:01.359 --> 0:19:04.359 Finkelstein and Amy, I guess we kind of want to 0:19:04.359 --> 0:19:07.520 get a little more practical as well, and so on 0:19:07.840 --> 0:19:10.120 an individual level, we kind of talked about insurance from 0:19:10.119 --> 0:19:12.879 a very high view, why it is that some markets fail, 0:19:13.040 --> 0:19:16.439 why they collapse completely. But on an individual level, why 0:19:16.600 --> 0:19:21.399 is insurance so often misunderstood? Specifically in what ways are 0:19:21.440 --> 0:19:24.520 everyday folks like us, like our listeners out there, how 0:19:24.600 --> 0:19:27.359 are folks using insurance improperly? 0:19:27.440 --> 0:19:30.800 Perhaps that's a really good question. I think the first, 0:19:31.080 --> 0:19:34.800 or perhaps the most important thing to understand about insurance 0:19:35.560 --> 0:19:41.680 is that insurance is about protecting against risk, not getting 0:19:41.800 --> 0:19:44.639 the policy once you know you need it. Once you 0:19:44.680 --> 0:19:47.119 know you need it, it's too late. You can't the 0:19:47.240 --> 0:19:51.840 risk has occurred and there's nothing to be done for you. 0:19:52.160 --> 0:19:54.000 Kind of like didn't your husband try to get triple A? 0:19:55.000 --> 0:19:56.760 I was about to throw them under the bus for 0:19:57.160 --> 0:19:59.760 so please do please do right? So, the point about 0:20:00.040 --> 0:20:02.760 durrance is you can't wait till the accident occurs to 0:20:03.320 --> 0:20:06.399 try to ensure it. And the example, one of the 0:20:06.440 --> 0:20:10.800 examples we give in the book is my hapless husband. Hapless, 0:20:10.800 --> 0:20:15.600 and perhaps many respects, but in this particular respect. We 0:20:15.600 --> 0:20:18.280 were in graduate school and he had an old, beat 0:20:18.359 --> 0:20:21.520 up car and he had you know, bare bones Triple 0:20:21.560 --> 0:20:24.280 A towing insurance that I think would only tow you, 0:20:24.280 --> 0:20:27.000 you know, to the nearest gas station or something. And 0:20:27.520 --> 0:20:30.640 his car broke down and he decided that he really 0:20:30.680 --> 0:20:34.879 wanted to go to his trustee childhood mechanic, who he 0:20:35.000 --> 0:20:37.160 was sure would treat him well, give him a good deal. 0:20:37.880 --> 0:20:41.240 And that was, you know, more than the nearest nearest 0:20:41.280 --> 0:20:43.480 gas station, who was about I think twenty miles away 0:20:43.480 --> 0:20:46.000 from from his childhood home. So you know, this was 0:20:46.040 --> 0:20:48.400 actually in the early days of cell phone, so this 0:20:48.440 --> 0:20:50.640 was the late nineties, so he's very happy he had 0:20:50.640 --> 0:20:53.760 a cell phone and he used it to standing there 0:20:53.800 --> 0:20:55.840 by the side of the road with his broken down 0:20:55.880 --> 0:21:00.280 car to call Triple A an upgrade to the premium plan, 0:21:00.359 --> 0:21:02.639 which which you pay more per month for the insurance. 0:21:02.680 --> 0:21:04.720 But one of the things that comes with is you know, 0:21:04.800 --> 0:21:06.960 towing of I think up to maybe one hundred miles 0:21:07.040 --> 0:21:09.680 or something. So you know, he thought he was very clever. 0:21:09.840 --> 0:21:12.280 The person on the other end happily takes his credit card, 0:21:12.680 --> 0:21:14.840 tells him that, you know, he'll be starting to pay 0:21:14.920 --> 0:21:17.960 higher premiums, you know, in the next payment cycle, and 0:21:18.760 --> 0:21:21.880 they'll upgrade that policy right away, sir, and it will 0:21:21.880 --> 0:21:27.000 go into effect in two weeks, right because waiting periods 0:21:27.000 --> 0:21:30.520 which are a frustrating aspect of insurance and do undermine 0:21:30.560 --> 0:21:33.120 some of the insurance value once you buy a policy 0:21:33.240 --> 0:21:35.199 or not really insured for the first two weeks, but 0:21:35.200 --> 0:21:39.320 they're designed precisely to deal with the situation in which 0:21:39.320 --> 0:21:43.080 people wait until they the risk has occurred to try 0:21:43.080 --> 0:21:47.359 to buy the policy. So that's one mistake that people make. 0:21:47.800 --> 0:21:52.760 I think a related mistake is that people can say, gosh, 0:21:52.800 --> 0:21:56.280 you know, I've been paying my homeowner's insurance for years 0:21:56.320 --> 0:21:59.200 and I've never had a pay I've never gotten a 0:21:59.320 --> 0:21:59.960 claim on it. 0:22:00.359 --> 0:22:05.160 What a waste cham I wish a tree had gone 0:22:05.200 --> 0:22:05.840 through my room. 0:22:06.040 --> 0:22:08.879 Well, precisely, like you know, that's exactly the point that 0:22:08.920 --> 0:22:11.959