First off, I am not an expert on insurance, but I don't think that Obama is either. On that basis, I think that my observations are as good as his. You have heard how Obama has been bad mouthing insurance companies lately. He seems to feel they are the cause of the high cost of medical services here in the USA. To understand what is going on, you first need to get a basic understanding of exactly what insurance companies do.
The insurance on my home is from a local "Mutual" insurance company. Now what is a "Mutual" insurance company? It is owned by the policy holders and is just a big group of people who get together and promise to pay for any damage that occurs to one of the member's homes. The chances of something bad happening to a members home is small, but the consequences to that single individual is great. The idea of the insurance is to pay a little when "nothing" happens to your home so that if something big happened, you would not be totally wiped out. It is "not" a free lunch. It is a little like gambling. If the chances of your home burning down is one in a thousand and your home is worth $100,000, your expected or average loss would be $100 per year. If a thousand "Mutual" members put in a $100 each year, there would be $100,000 in their pot to pay for the average home that burnt down each year. That is all insurance is. It is the same for medical and works the same way. As you would expect, there are administration costs that any insurance company would have and they would have to be added in. Also, they would expect to make a profit.
My point with this Blog is to call attention to all the insurance that is out there and the ones that the government is involved in. The insurance business is "not" controlled on a national basis. It is a state by state activity, like speed limits and drinking age. The national government is involved in insurance and here are a few of the places. Home financing is one of the biggest with Fannie Mae and Fannie Mac being the two largest. What they do is provide insurance on the mortgage notes so that investors will purchase them "from" the government at low interest rates. The government assumes "all" risk of the mortgage note going bad. The original bank who made the loan is insured or off the hook if the loan goes bad. They call it "non recourse", but it is the same thing as insurance. If the loan goes bad, the government, us tax payers, make good on the loan to the investor. Us tax payers have trillions at stake and have had to come up with hundreds of billions since Obama has been President to pay off investors 100% on the dollar.
AIG got into the "same" insurance business as our government by writing insurance policies just like those of our government so that marginal loans notes could be sold to investors as low interest rates. The rates that AIG charged were so low that when a bunch of notes went bad, they did not have enough money in reserve to pay off the bad notes as they had promised. Now insurance companies are regulated at the state level which meant that the state of New York should have been looking at the AIG books and making sure they had enough reserves for the amount of risk they were taking. Can you imagine a local insurance agent going around an writing "cheap" insurance policies and pocketing the money and not really having any reserves to back up what he was selling? That is what AIG did and so did Fannie Mae and Fannie Mac. In the case of the government, they did not want to charge a high enough price for their insurance or require larger down payments because they wanted to encourage everyone to be able to live in an expensive home.
Farmers have had crop insurance written by the government for years. Before a farmer plants corn, he figures that he has to make 100 bushels to the acre to break even and if he gets below 75 bushels per acre he will be out of business and lose his farm. To protect from this risk, he buys crop insurance from the government for 90 bushels per acre. If it goes below 90, the government pays him the value of the difference. If it is over 90 bushels per acre, the farmer does not get anything. I'm just trying to show that our government is highly involved in the insurance business.
How about medical insurance? Both the federal government and every state government have some kind of medical insurance systems. It is every place. The bottom line is that insurance is a "good" idea. If we did not have insurance systems, each individual would have to take a lot less risk in their lives and businesses. The result would be a much slower economic system because no one would want to assume much risk in any business adventure.
In the Amish community, they have insurance too. If their home or barn burns down, all the Amish in the area come together and build them a new home or barn. They have an "after the fact" mutual insurance system. How about the Church helping or the Red Cross? All of these groups provide insurance for things that don't happen very often. They just provide it in different ways. My wife is active in the Hos pis program in our area. It is a type of insurance too provided by volunteers.
When Castro took over Cuba and the ITT telephone company, ITT had an insurance policy with the USA government that paid ITT the value of the telephone company stolen by Castro. Most people have no idea that us tax payers paid ITT for the loss of their telephone company. When a German company tried to buy the old ITT telephone company from the Cuban government, our USA government stepped in and stopped the deal. Do you recall that and wondered why it was such a big deal for our government? Well, now you know.
Next time you hear Obama shooting off his mouth against insurance companies, remember that insurance is needed for our economic system to work. If we did not have insurance, after a time the lucky ones who did not have any claims would end up with all the property and wealth. All the smaller under capitalized players would go bust and be out of the game. Insurance allows all of us little people to play with the big boys. Remember that.
