Sunday, March 21, 2010

Insuring Cadillacs and Cadillac Insurance Plans

This completely useless discussion of auto insurance rates highlights two things.  First, that even the venerable New York Times will endorse garbage analysis.  Second, that too many people have not the slightest understanding about the basic principals of insurance. 

So, what does insuring fancy cars have to do with fancy health insurance plans? And, why does anyone care, because you're unlikely to read this before Sunday night??  I'll answer the first question, not the second!

The author's first brilliant observation is that freakin' expensive cars (technical insurance term) have very high cost insurance.  That's positively earth shattering.  But on a normalized measure of insurance costs per $100 of car, the Porsche GT costs about $2.40, versus the Mazda Tribute at $4.00.  The Porche's a bargain to insure!

It could be fixed costs explain the whole thing.  Suppose issuing and servicing the policy costs $500.  Then, the Tribute has a risk premium of $500 ($1000 for policy minus $500 fixed costs), and the Porsche has a risk premium of $2500.  Five times the car, five times the price for insurance risk bearing.

Insurance depends on risks of the insured, costs to issue policies and expected costs to pay claims.  Without understanding all three, you can't really speculate on expensive versus cheap.

What does this have to do with health care coverage?  Health plans have the same basic problems.  Here's an example near and dear to my heart.  My old company in Seattle has on average very young employees and extremely good health care coverage.  The cost runs about $1100 a month for a family.  Another plan, with which I have some familiarity, for a not-for-profit in New Jersey, has far more limited benefits for a smaller group of significantly older employees, and runs closer to $3000.

No one would call the second plan a "Cadillac" by any stretch.  The big cost drivers are New Jersey costs of providing medical services versus Washington, and the age of the covered population.

Proclamations about insurance costs based on headline numbers make no sense.

1 comment:

  1. Hi
    Look at what they charge for plates for the more "Cadillac" car verses the "Mazdas" also. Why is this when it used to go by the weight of the car?