In repetition of something explained in one of my original blogs, insurance is not more than the substitution of a definite loss–the premium–in exchange for removing the potential for a larger financial loss if a covered peril occurs. It’s the payment of an insurance premium to eliminate a possibly larger loss if an insured peril occurs that would cause a devastating loss to the insured at a later date, during the time the policy remains in force. The fuction word in any insurance contract is “potential,” for the insurance contract is only meant to cover against the eventuality of a potential loss if a covered peril occurs. It is not meant to address losses that are “certain” to take place.
The current Health Care law mandates the coverage of pre-existing conditions; in other words, it mandates coverage for losses that are certain to occur. This action on the part of the government de facto legislates insolvency on an insurance carrier. Actuarially, either companies charge a premium large enough to cover a pre-existing condition to ensure adequate “reserves” to defray the losses or the insuance company forced to pay for them without adequate reserves will eventually fail. In this aspect, the government has overstepped its reach and its actions are questionable as to motivation and intent.
The purchase of life and health insurance coverages ahead of contracting or developing health conditions that would render us uninsurable is the responsible action we undertake when we purchase insurance while healthy. We clearly begin to incur a modical loss every time we pay a premium without incurring a loss, technically without having to, only to ensure coverage later, at the time an illness or death strikes while covered by insurance. It’s this principle of diverting funds early toward future obligations that works against the concept of “adverse selection.”
Adverse selection occurs when an insurance company underwrites a peril that is inevitably going to occur. In other words, adverse selection takes place when a sick person seeks insurance coverage only after knowing an illness is present or death is imminent. With this current, legally imposed practice, the insurance carrier is unable to reserve or set aside funds with sufficient time to overcome the cost of the claim the company will have to pay on behalf of its insureds.
Some would construe that the new law is meant to drive insurance companies out of business in order to create the appropriate environment for the enactment of the “public option.” The public option places the government as the single payer of health claims and essentially eliminates competition. The elimination of private sector competition would either create a new bureaucratic entity altogether or it would expand considerably the existing government structure that currently dispenses Medicare benefits. Not only conspiracy theorists would have grounds to suspect cronyism and payment for political campaigns with government jobs by the continued and relentless expansion of the federal government as the true motivation behind this portion of the legislation.
It would be edifying to hear your arguments negating or concurring with these comments.