Speaking of Insurance

Unfortunately, I must name a particular brand to make the point. It's not meant as criticism, only as another example of how people often don’t ask the right questions about money and economics.

The example is the Allstate commercial about their accident forgiveness program. Whenever I see it I ask, “Where do people think the money is coming from – surely not some magic money tree?” But that is the impression the ad leaves. Have an accident and your rates don’t go up, even though you expect the insurance company to pay for the repairs.

If the company has some sort of accident forgiveness fund set aside in a secret vault, where does that money come from?

As always, the company’s money comes from their customers. They use it to pay their employees, pay their rent and utilities, pay the claims that come in, reward the shareholders by making a profit and pay for the production and airing of those television commercials. To make this work, they must collect more money in premiums than they pay in claims! On average every one of their customers pays them a little more than they get back; that’s true for all insurance companies – even the non-profits.

Generally, insurance companies reward good drivers by raising premiums only minimally to account for inflation and industry-wide claims experience. Drivers who have accidents are considered a higher risk and must pay more, so on the surface accident forgiveness sounds like a good deal. But beware the details. 

The program has been around for a long time. Here from Fox Business back in 2011 is one explanation of some of those details. It’s not free. “At Allstate, for example, you get accident forgiveness by upgrading to a Gold or Platinum coverage plan. Gold costs 8 percent more, and Platinum 15 percent higher than a standard policy.” To qualify for Gold coverage, “you need to go three years without a collision,” but with Platinum coverage it kicks in immediately.

So there apparently is an accident forgiveness fund, but the people who signed up for the program are the ones funding it. It’s almost like buying auto insurance and then buying more insurance against a first accident. 

It’s similar to life insurance where the company is betting, based on life expectancy tables, that you are not going to die until you have given them enough money to invest and come out ahead. For auto insurance they set rates betting you are not going to have an accident, based on your driving record so money is left over to pay for the exceptions. The added premium is a bet you make against the company to protect you against an unforeseen incident. 

The rest of the article says that this added protection might be good for some but not for others, and it’s best to talk it over very carefully with an agent. 

Several other companies also offer some form of accident forgiveness and the Allstate program may have changed since this 2011 review, but the main point remains the same: There is no magic money tree! Companies don’t reward us out of the goodness of their hearts or by lowering the CEO’s salary. They collect it from their customers; and in every transaction it’s our choice whether a purchase meets our needs and is fairly priced compared to the competition.

Someone is Always Watching

While no one is paying attention, our privacy slowly slips away. We have at our fingertips all kinds of new technology that makes life so much easier and more convenient. At the same time, it puts everyone in a position to be held accountable for every mistake they make.

This was brought home to me by two stories on the same day this week on CBS This Morning. The first was about new technology in cars, and the second about a controversial photograph.

The auto technology story is very interesting. The new touch screens on some of the higher end cars help with navigation for regular trips as well as for emergencies. If the car is low on gas, it will direct the driver to the nearest service station and allow payment from inside the car and allow occupants of the car to order food from the snack bar inside. The Wi-Fi modem also allows drivers to make reservations on the way to a destination.

This sounds very convenient, but all that convenience comes at a price. While drivers take advantage of these new gadgets, the car is recording all kinds of data with “the power of 20 personal computers and [it] can process up to 25 gigs of data every hour – some of it beamed back” to the manufacturer. 

The data includes not only driving habits, but also personal preferences. There is so much data that experts estimate that the data stream will soon be more profitable to carmakers than the car itself. Information about purchases can be sold to advertisers who may also pay to put promotions on the screen. Drivers can now voluntarily share data with insurance companies to take advantage of good driving habits and secure a lower rate.

If people don’t fight to keep this information voluntary, however, think of how fast it can get out of control. This, like the cell phone, is one more source for law enforcement in case of crashes, other motor vehicle incidents or criminal investigations. It is a possible source for insurance investigations or rate setting, an additional source for spam (disguised as targeted advertising) and many other problematic scenarios as the cars record location, stops, speed, erratic driving, hard-braking and driver eyelid movements with inside cameras. 

All this seems harmless and some of it is even good, leading to better safety and maintenance, but make one mistake…. Your car is spying on you.

But spy-like technology is not only in your car: it’s everywhere. The second story was about the prom photo from Baraboo, Wisconsin where a group of 30 high school boys seemed to be making a Nazi salute. The staged photo from last May was posted to Twitter last Sunday and has sparked “international outrage.” 

CBS didn’t identify who posted it or find out why it would be posted six months after the fact. According to one of the students who didn’t participate, the photographer only said, “Raise your hand,” and he thought the idea was just a joke on the part of some his classmates. The photographer denies the charge against the boys saying it was supposed to show them waving to their parents. No one talked to any of the other students to find out their intentions. But it’s too late, as our wonderful technology instantly allowed people around the world to be shocked and outraged.

It is without a doubt that CBS and other news outlets picked up on this story for the shock value. But is it really shocking that a bunch of high school boys would participate in this kind of tasteless, insensitive horseplay? And it wasn’t even premeditated, as was the case of Prince Harry wearing a Nazi uniform to a party when he was two or three years older than these kids. But the outrage merchants never cut anybody any slack. (It’s a good bet none of these boys will be eligible to serve on the US Supreme Court forty years from now.)

Remember, no one is allowed to make mistakes (or bad jokes) anymore. Someone or something is always watching, recording or posting, eager to spread or sell the information. Scary!

Critical Thinking and The Mail

Yesterday was my birthday, but I wasn’t born yesterday. Nor am I naïve enough to fall for all the advertising tricks that come my way. This must come as a disappointment to many companies. I got many examples in a single day last week when I picked up the snail mail.

First, let me repeat the assumption that a large percentage of the ads we see must be working to some extent. If consumers didn’t respond to the ads and buy the product, the company would either change their approach to advertising or go out of business. So let’s go to the mail.

The first envelope contains a typical auto insurance ad. It tells me I can save 15% or more on my insurance simply by switching to their company. (The number of discounts they can offer will make my head spin!) But didn’t I just receive a mailing the week before from another company telling me how much I would save with them? Theoretically, someone could keep switching back and forth between companies, saving with each switch, eventually paying almost nothing. That is certainly too good to be true. So this one gets recycled.

The next one is supposedly from my bank offering me a credit card with a 5.99% APR rate fixed for life. I don’t get too excited, because the fine print gives away some additional information. It’s not really from my bank; all my bank did was sell a mailing list with my name on it. The rate shown boldly at the top of the letter applies only to balance transfers during the first 3 months. After that it’s 15% to 24%. They are no doubt counting on the fact that people who already have a balance to transfer will also carry a balance with them and end up pay the higher rate (for life) – along with the possibility of some $37 late payment fees. This great deal follows the insurance offer into the recycling bin.

But wait – there’s more! This one according to the return address comes from “Your Local Office” in a city I am not familiar with. A gentleman working there is saving my free copy of the Medicare Guide. All I have to do is tear off the stub and mail it back telling my age, phone and email – so he can haunt me for the next year? No, thank you! (The actual name of the company is in the fine print at the bottom of the letter where I am informed that it is not affiliated with or endorsed by any government agency.) Out it goes.

Finally, the letter offering me wonderful, affordable health insurance joins the rest.

This is not the first time I have seen these or similar letters. So what could be the reason that these mailings continue? Someone must be responding. Perhaps it is the people who relieve stress by cow cuddling.

That’s right, for only $300 for a 90-minute session, the latest health trend, according to this source, is “snuggling up with a 1,000 lb farm animal to help with your mental health.” One farm in New York “has a program offering the ‘Horse & Cow Experience’ where individuals can spend time connecting with the large barnyard animals.” When it comes to mental health, paying $300 to spend time snuggling with a cow seems more diagnostic than therapeutic!

I wasn’t born yesterday, but based on the mail I receive and the latest health trend, yesterday must have seen a figurative baby boom. If we get drawn in by these, how will we ever start using critical thinking to solve real problems?

Not All Insurance is Alike

In about two weeks people will be eligible to sign up for health insurance through the state and federal insurance exchanges as required by the Affordable Care Act. States are preparing call centers to walk their citizens through the complexities of subsidies and how to qualify for the different programs.  Meanwhile, according to this article much confusion remains about the law itself.  “Slightly more than half of 1,500 people polled by the Kaiser Family Foundation in August said they didn't know enough about the law to understand how it will impact their families. And 44% of 1,000 people polled separately…said they weren't even sure the law is in effect…”

This got me thinking about how different health insurance is from other types:  life, auto, homeowner’s, etc.  You can’t just say that insurance is insurance.

The first difference is that most people buy other insurance hoping they will never need it.  I don’t buy insurance on my house thinking, “Next time it burns down, I won’t have to pay” or buy auto insurance thinking, “When I wreck the car the insurance will cover it.”  Typical thinking is that we buy insurance in case something bad happens, but hope it never will.  Happy auto insurance customers are those that go many years without a scrape or dent.  They also tend to get better rates.  Health (or dental) insurance, on the other hand, is insurance we expect to use.  We think, “Next time I go to the doctor I’m covered.”  We hope for good health, but we realistically expect every year to pay premiums and receive some benefit.  Some people see a doctor once a year, some less frequently and some many times a year, but the rates are now based more on income than on usage or experience.

The second difference comes in the choices of coverage.  If my insurance agent tells me that my auto insurance also covers my boat, I would say that I don’t have a boat and don’t want to pay for boat insurance.  It’s my choice, and I don’t want to help subsidize all the boat owners with my premium payments.  If a health insurance policy tells me that it covers chiropractic visits, and I have never seen nor do I ever expect to see a chiropractor, and I don’t want to subsidize those who do; too bad.  That’s the policy.  Sometimes the law tells them what they must cover.  As obesity is declared a disease, those who don’t need the coverage for treatment and counseling, must buy it anyway.

With other insurance you get estimates for your car repair or an appraisal on the house damage so you have an idea of what it will cost.  With health insurance you often get the service first and the insurance surprise later.  Perhaps that’s because the medical charges are also a surprise, sometimes trickling in over a period of months from providers you never recall having seen.

Finally, have you ever gone for a car repair and been told that the price will depend on whether it’s covered by insurance or not?  Would replacing a house roof cost less because it was insurance-covered wind damage or just old age?  That’s not been my experience.  It’s common, though for doctors and dentists to charge the uninsured a higher fee than the one negotiated by insurance companies.  A flyer in my mail recently told me that a certain Medicare Advantage plan saved members on average $3,364 last year on prescription drugs – then the footnote explains:  compared to “retail prices paid for drugs purchased by individuals without insurance.”  Isn’t that insane?

Health insurance just doesn't look or act like other insurance.  It’s no wonder people are confused.

Why is My Car Insurance So HIgh?

A new survey by Insure.com ranks auto insurance by state and makes a clear point about economic understanding.

This USA Today article explains that rates are higher in general where there are more accidents and more claims, so states with big cities tend to rank higher, but individual factors also play a large role.

The highest auto insurance rates are found in Louisiana.  “Louisiana's problem, according to Insure.com, is that folks there make big claims and sue each other a lot in front of friendly judges. Says the site: ‘A high portion of Louisiana drivers who are in accidents file bodily injury claims. Also, car accident lawsuits for less than $50,000 go before elected judges,’ who it says tend to side with consumers more than insurers.”  Are they really favoring consumers over insurers or are they merely spreading around the cost of these litigious citizens, making their state number one in premium costs for all citizens?  The answer is clear from the data.

In Michigan, the number-two state, “residents pay more in part due to ‘the state's guarantee of unlimited, lifetime personal injury protection benefits for treatment of injuries from a car accident.’  It says insurers pay the first $500,000 and medical expenses above that are paid by a Michigan Catastrophic Claims Association, which adds a fee to everyone's insurance premium ($175 per vehicle this year).”  Again the costs of a few are spread over the entire population.  A number of years ago the citizens of Michigan were given an opportunity by referendum to overturn this costly rule.  They overwhelmingly voted to keep it in place, but continue to complain about extremely high auto insurance premiums.  (Legislation is currently pending to modify this requirement.)

This reinforces the point that there is no magic money tree, no secret stash to absorb excessive legal damages or medical claims.  Despite what friendly judges might think, the insurance companies are not going to absorb those costs – not if they expect to stay in business.  Michigan’s state fund does not have it’s own source of income.  It must be financed by the high premiums everyone resents.  Whenever payments are handed out or future benefits promised, it is crucial to ask where the money is coming from.  Too few Americans do this and always seem surprised when they are required to pay the higher cost in the end.  Sometimes they pay through higher insurance premiums, sometimes through higher prices, unfortunately, in a few cases they pay by losing their jobs.  Understanding the economic process, keeps us from looking at short-term benefits as windfalls, knowing that it will be us (or our children) who will eventually pay the price.

Shortest Month of the Year

In honor of the shortest month, here are a few short examples in the key behavioral dimensions.

(Critical Thinking)  A yogurt container reads "From cows not treated with rBST."  Below is added “No significant difference has been shown between milk derived from rBST treated cows and non-rBST treated cows.”  The only reason to make the first statement would be to satisfy people who incorrectly believe that there is a difference.  Would a farmer intentionally put water into his tractor’s fuel tank or something harmful into his cows?

(Perspective)  Last year at this time, you couldn’t turn on the radio or TV without hearing about Jeremy Lin, a basketball player from China playing for the Knicks.  He was “Lincredible,” sparking “Linsanity” at Madison Square Garden.  This year it took two searches to find recent news about him.  When I did, it was asking “What does Jeremy Lin need to do to turn his season around?”  A better question would be:  Why do we allow ourselves to be so easily caught up in the hype?

(More Perspective)  Does anyone know what suffering means anymore?  A radio ad asked me if I was suffering from hair loss.  Well, I have a lot less hair than I used to, but I’m certainly not suffering!  Another asked if I was suffering from hypertension.  I thought it was called the silent killer because it shows no physical symptoms until it’s too late.  Again, I hear of couples suffering from infertility.  The inability to have children could be a huge disappointment to some, but is it suffering?

(Discipline)  “Binge drinking continues to be a worrisome, under-recognized health problem among women and girls, according to a new CDC report. Nearly 14 million women binge drink about three times a month, and consume an average of six drinks per binge…” Social pressure and other factors may contribute, but no one is holding a gun to your head forcing you to drink to excess.  It's just a poor choice.  (The same goes for men.)

(Responsibility)  Whatever happened to:  “Ask not what your country can do for you…”?

(Critical Thinking)  Another reason to exercise caution with dietary supplements is that in response to FDA warnings, at least one company just changed the name on the bottle and kept selling it. 

(Even More Perspective)  How can the number one news story on January 15, 2013, according to all the major media outlets, be that Lance Armstrong admits using drugs?  All he did was ride a bicycle.  Sure, he was the best in the world, but really, how important do we make riding a bicycle?   During the same week another story considered important enough to make national headlines told of a Notre Dame football player’s non-existent girlfriend.  While we are stressing over these issues, people are dying in Syria and rioting in Egypt.

(Economic Understanding)  If the government couldn't borrow money and couldn't spend more than they had unless they sent everyone a letter saying, “This is what we are doing and your share is $X; please send a check,” would that change their behavior?

(More Critical Thinking)  How can every car insurance company save me money over every other car insurance company?  All their ads say so.

(Final Critical Thinking)  In another example of substituting derogatory nicknames for scientific discussion, as happened last year with "pink slime," the critics of a genetically engineered salmon have dubbed it "frankenfish."  The company spent 17 years doing research and winding through the approval processes of the FDA and other government agencies.  The salmon are shown to be environmentally safe and safe to eat, but opponents hope to build a grassroots protest by attaching a scary name.