Insurance in the U.S.

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“”We're insurance men, Nate. We don't care about who's innocent and who's guilty. Just who pays.

—Sterling, "The Two-Horse Job" Leverage (2008)

Insurance is the business of paying a company a certain amount of money every month so that they will pay you some money in the event that you suffer a loss to your automobile, health, personal property, or dwelling. Certain restrictions may apply.

This business model has been broken up into various areas of focus, but all share the same quirks to screw people over, usually based on keeping most people ignorant of how insurance works.

Not a business

The oil industry wishes it were as embedded with the United States government as insurance is, because insurance companies are exempt from being considered interstate commerce subject to the regulation of the government. Despite the fact that insurance companies operate across state lines and use almost the exact same forms and contracts across the nation, only health insurance is considered commerce, and that only recently became an exception. The insurance industry has made it a point over the course of U.S. history to cozy up to lawmakers so much that it simply wasn't considered interstate commerce until FDR's attorney general attempted to break up an insurance in 1944 under the authority of the Sherman Antitrust Act. The insurance underwriters argued that insurance wasn't a business or commerce; the Supreme Court disagreed.

After losing that case, the insurance industry bought off Congress and the McCarran-Ferguson Act was passed, exempting insurance from almost all regulations, including anti-trust regulations. This goes to show how special the insurance industry is compared to others: when the Affordable Care Act was being discussed in the Supreme Court, one of the questions asked was why it was so special that it needed federal regulation. Nobody even bothered to think about how strange it was that insurance was considered exempt from regulation, even though every state except for New Hampshire mandated that car owners carry insurance well before the ACA.

This essentially leaves businesses with nationwide resources contending with 50 different states' worth of regulators. As state legislators and regulators are generally more obscure than federal ones, they are easier to bribe and manipulate. If any state's regulations get too onerous, the businesses can just leave.

Fear, investing, and irony

The House always wins, and insurance is the House in comparison to regular folks. Insurance companies have the very best statistics in determining how likely people are to experience various claims. They are perfectly willing to run commercials about break-ins, floods, storms, and fires to stoke people's fears and sell them insurance that most won't ever need. They claim that having broader coverage directly influences how cheap they can provide insurance, which is part of how they justify charging people more.

That claim is not entirely true, however, thanks to the stock market. Insurance companies don't simply keep premiums in a bank, pay out on occasion, and make profit on interest and money that accumulates in excess of the policy limits of their customers. They keep very little of the money paid them available for claims. Instead, they invest the money they are given by insureds, making potentially enormous profits. This works the other way as well, opening them up to potential losses that could leave them unable to pay their customers in the event of a catastrophe. This should sound familiar to anyone who has kept track of the banking industry and its history with the Glass-Steagal Act.

The 2008 recession brought all this to its inevitable conclusion. Insurance companies, facing losses in the stock market caused by bad investments and failing confidence in the market, sought to get a piece of that hot bailout action. Some of them were already approved as being too big to fail, like AIG and MetLife, though MetLife opted out when they saw the terms of the bailout. Other insurance companies looked into the program as well, asking President Bush to include them. One, Genworth Financial, even attempted to purchase a bank so it would qualify for the bailout before being informed it had waited too long to qualify. In the end, while insurers lost a lot of money they were supposed to use for paying off claims, only a few opted to take TARP money because of the restrictions it placed on them.

This goes to show that the businesses with the best oddsmakers around can still fall prey to obvious bad investments, and that the insurance industry is big enough to absorb the losses of a major recession with little to no help from the government. They are literally too big to fail.

General screws

The question isn't if insurance companies will screw people over, but how. Granted, some of these strategies no longer apply to health insurance thanks to the ACA, but they are still a part of other lines and rely on most people failing to read their policy or lacking money to buy into better coverage:

Limits

The most likely items to be stolen or damaged are often specified as having limited coverage. These include cash, jewelry, and firearms. If you lose more than the stated limit, you won't get paid for it. The specifics vary, but these limits are usually equal to or below the deductible, meaning plenty of people will get paid absolutely nothing if their wedding ring and mom's old jewelry gets taken. Insurance companies have no problem asking their adjusters not to warn insureds that their claim isn't worth enough to get paid, which could convince insureds to withdraw the claim. The insurance company won't pay insureds, but they will increase the size of their premium for having filed a claim.

It's possible for insureds to pay more to increase these limits, but that requires they 1. know about the limits and 2. can afford the endorsements.

Deductibles

One of the ways monthly insurance premiums are determined is by adjusting how much of a claim an insured will have to pay out of pocket. Standard deductibles for homeowners, for instance, include $500, $1,000, and $2,500. A higher deductible equals a lower monthly payment for insurance, and vice versa. For anyone living paycheck to paycheck, this incentivizes having a higher deductible, which necessitates larger claims and more damage before an insurance company will indemnify them. As with coverage limits, insurance companies prefer if insureds don't know their own deductible so they can both deny their claim and raise their premiums.

"Misrepresentation"

It's common practice in the insurance industry for companies to include inappropriate questions on insurance applications about subjects like arrests, liens, license suspensions, and bankruptcies. It is also common for insurance companies to run a background check on insureds who file a claim. In many claims that are likely to be more costly or disputed, they also often ask adjusters to record a statement from the insured that includes the same questions asked on the application. All of this is done in an effort to avoid paying a claim. If an insured is found to have left something out on their application, or if they remember that time they were arrested during the statement but not during the initial application, the insurance company is allowed to deny the claim right then and there. Further, they can revoke the entire policy and leave someone with no coverage without warning.

Insurance companies, understandably, don't want to be defrauded. There is a legitimate reason for taking precautions, and some nut will occasionally try to engage in the fabrication of a claim (called Hard Fraud). However, most of the questions they use for this purpose have nothing to do with preventing fraud. Further, they could have run a background check at any point but it would have cost them premiums; they choose to wait until insureds might take money from them rather than give them money. Further, Hard Fraud is known as the least likely form of fraud in the insurance industry. Most fraud is Soft Fraud, the exaggeration of a legitimate claim.

Price documentation and depreciation

In claims involving damaged or stolen personal property, insurance companies use methods meant to prevent Soft Fraud in order to reduce the amount they need to pay insureds. The most obvious method is through researching Price Documentation. Insureds fill out a form describing what was lost in the claim, and how much they think they should be paid for it. Insurance adjusters then look up the current prices and use them for their contents estimate. Then they apply depreciation, neatly screwing insureds out of money they should be paid.

Depreciation is how much something loses value over time, like how the magic Internet sex engine you're reading this on isn't worth a used hanky after four years. If you looked up the price of a four-year-old computer today, you'd find you could get it for much less than when it first came out. That's depreciation. The insurance company then subtracts a certain percentage (for computers, usually 25% per year) of that price to account for depreciation, effectively accounting for depreciation twice. That's called screwing you. (It's not called fraud; it's only fraud when the customers do it.)

Perils

At the risk of making this sound like some sort of comprehensive encyclopedia, insurance policies can be either All Risk or Named Peril. All Risk policies are more expensive, but cover everything except for exceptions listed in the policy itself. The burden of proof is on the insurance company to prove that a claim was caused by one of these exceptions if they don't want to pay it. Named Peril policies, on the other hand, are cheaper and only cover certain listed perils within. The burden of proof is on the insured to prove the claim should be covered. The same insureds the insurance company purposefully tries to keep unaware of their coverage limits and deductible.

If your state is currently besieged by either patriotic militias or evil terrorists, any and all warfare (civil, undeclared, revolution, rebellion, etc.) is excluded. And lest you think of tinkering with a homemade nuclear bomb, remember that "Discharge of a nuclear weapon will be deemed a warlike act even if accidental."

That said, those who think it's just horrible that the ACA might force everyone, even men, to pay for birth control coverage can rest easier knowing that everybody in the country with homeowner's insurance is paying for protection from volcanic eruptions. But not for any shifting earth or tsunamis caused by volcanic eruptions. We gotta have limits here, folks!

Floods

Most insurers don't cover floods. Their justification is that floods are typically confined to certain areas. They are almost certain to occur in those at-risk areas, and cause widespread damage, essentially making paying out less a gamble and more a certainty for insurance providers. Insurance companies claim they can't pay for it because they try to take a little from all their insureds to cover major damage to a select few. As we already know from their use of the stock market and collection of premiums for years on end without paying up, this is head-over-heels horseshit. And, because of how they offer nationwide coverage of volcanoes, we can guess they're more concerned with avoiding definite payouts that reduce their profit margin because they happen a little more frequently.

In part because the government always has to absorb some of the costs of natural disasters anyway, Congress created the National Flood Insurance Program in 1968. The NFIP offers flood insurance that mitigates some of the cost by collecting insurance premiums in return for flood-prone communities implementing changes to lessen the impact of floods. Because it wasn't meant to be profitable, it charged homeowners less to cover their floods. This has led to the program borrowing from the government in bad years, and has made it ripe for politicians proposing financial reform. In response, Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012, requiring increased premium rates and cutting some subsidies.

In response, private Florida insurer The Flood Insurance Agency started offering private policies costing less than what Biggert-Waters would raise the rates to, but more than what they had been before Biggert-Waters was passed. Hmm.

Litigation

It's common knowledge that insurance companies will screw people over, so they really need to stay on their best behavior or risk a lawsuit, right? Forgetting their vast monetary assets, let's remember that the investigation of a claim is entirely up to them. The longer the insurance company draws out the process of denying or approving a claim, the less likely an insured will be financially capable of suing a company over their bad practices. The insurance adjuster has to investigate and write an estimate. The claims manager checks it over and can send it back to the adjuster for further clarification, which can necessitate another inspection or request for documentation from the insured. If it passes the claims manager's muster this time around, the claims examiner can send it right back. If the claim is big enough, the company's Chief Financial Officer will have to sign off on it, usually necessitating at least one or two more requests to double-check the claim and clarify the necessity of the payment.

Meanwhile, the insured has a damaged home or automobile they can't repair because they don't have the money. They have to pay for a new place to stay and a new means of conveyance. The insurance company will pay for it if they send their bills, but only if the claim is approved. Also, these additional expenses will only be approved if they exceed normal living expenses, so insureds get to pay for taxes, utilities, and the mortgage of their damaged home, as well as eat the cost of a temporary apartment unless it exceeds those house bills. That doesn't include all the other hassles like potentially increased gas mileage to and from work, increased cell phone charges, credit check fees for renting, eating fast food instead of cooking, boarding pets, and so on (all of which the insurance company won't mention can be included when calculating additional living expenses accrued from a claim).