What insurance is and what it isn't

Extremely popular misconception.

Wrote a decent comment explainer.

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Commenting on

https://www.bloomberg.com/opinion/articles/2020-10-15/essential-part-of-obamacare-needs-expanding

 "if the companies can avoid anyone who might get sick, insurance ceases to be insurance"

I find it appalling how 99% of commentators (even presumably math savvy ones like Cathy) don't distinguish insurance from redistribution. So let me recap. Insurance (in a narrow sense) is about dealing with unpredictable risks: if any one of our cars is equally likely to get into accident costing $10K in repairs and the chance for each of us getting into accident is 1%/year, we can each pay 1%*$10K = $100 (+tiny insurance company profit)/year in insurance for the peace of mind. Note $100 is exactly the expected yearly loss from car accident for each of us, so it's not like we're getting a bonanza of free or cheaper repairs: we are still paying our expected costs, but get valuable peace of mind and certainty. In reality, people don't all have the same chance of getting into an accident, so we have experienced driver insurance discounts and surcharges for recent accidents. The insurance is fair if everyone is paying their expected cost. The benefit of insurance proper is not lower expected costs, but much more desirable distribution of outcomes: no huge unexpected losses, certainty and peace of mind. Inexperienced driver surcharge doesn't mean "insurance ceases to be insurance". And of course if you totaled your car while driving without insurance, you can't really sign up for insurance for the usual price and get it to pay for your repairs. Now, if you're a very careful driver, and your friend is kinda sloppy but so far was lucky enough not to get into any accidents, you'll still be paying same insurance rates, which is unfair given you and your friend actually face different risks going forward. The more precise the insurance company can get with measuring those risks, the more fair insurance pricing can be, so that in an ideal world everyone is paying their own expected costs, not somebody else's. Those are obvious points, but it's important to have them in mind in that relatively neutral context, as all of them become hotly contested once one starts talking about health insurance. This happens largely because many really want to do redistribution when it comes to health costs: if somebody has a gene guaranteeing them cancer at 45, is it really just for them to be paying full costs of that? That said, pretending insurance must be redistribution, as Cathy does, is not a solution, and, in our particular case, leads to having both insurance and redistribution messed up. If insurance is not allowed to charge expected costs, even when it's very obvious, you get all sorts of adverse selection and gaming the system we've seen in recent years. If insurance is not allowed to charge expected costs, a healthy and conscientious young small business owner can't get insurance for any reasonable cost, because all the other guys he's forced to pool with are gaming the system and only signing up for insurance when they get conditions. If insurance is not allowed to charge expected costs, there are less incentives for people to do their best to stay healthier, nor, maybe more importantly, for insurance companies to work really hard with their abundant data to figure out what actually helps people stay healthier. The only good option for insurance to work is to leave it alone and let it charge expected costs, as it does in most other contexts. The real question is what should we do re redistribution. This is what we should focus on, not fixing unintended consequences of regulations intended to fix unintended consequences of us messing up the health insurance. Medicaid for all (or catastrophic medical insurance) with smallish mandatory contributions by almost all combined with a push on the cost side is one idea which I feel is a decent start.