Friday, April 01, 2011

Health v. Auto Liability Insurance

A disussion about health insurance invariably brings up a comparison with auto insurance which is required by law.

The primary difference between auto and health insurance is that auto insurance is for a liability that one incurs when driving a vehicle. Health insurance pays for personal consumption.

Being involved in an accident automatically involves the legal system. If I ran you down in the crosswalk and you suffer a broken leg; there would be a legal claim to determine your compensation.

You and I will have different ideas about just compensation for a broken leg. I think you'd heal up well if you put your leg on a pillow with an ice pack. You are likely to want a doctor's visit, and might throw extra costs in the mix just for spite.

The legal liability (not the risk) is the driving force behind the requirement of auto insurance.

Auto accidents, by their nature, involve courts.

Health insurance is a means for funding personal consumption. When one buys health insurance, one invites the legal system into personal health insurance. Health insurance works as follows: a person buys into a group pool. In times of need, the policyholder places a claim against the pool. An insurance claim is a legal action defined by the courts.

The big difference between health and auto insurance is that health insurance invites the courts into decisions about personal consumption. Auto insurance, on the other hand, covers liabilities in which courts are already involved.

There are some aspects of health insurance that involve liability. For example, workers' comp covers liabilities of an employer. If you suffer an injury during work, that injury is the legal responsibility of your employer. A restaurant that serves unsafe food is liable for food poisoning. A toy manufacturer is responsible for product liability, etc..

The difference between standard liability insurance for an automobile and health insurance is that liability insurance, by its nature, involves the legal system. Health insurance invites the court system into questions about personal consumption.

As I do not want court involvement in my health care, I have been working on developing a viable alternative to insurance.

Insurance is the proper way to fund liabilities that involve third parties and the courts. The system fails with personal consumption because it invites the courts and government into regulating personal consumption.


RD said...

"The primary difference between auto and health insurance is that auto insurance is for a liability that one incurs when driving a vehicle. Health insurance pays for personal consumption."

No, the primary difference is the distribution within the dataset. Auto insurance costs having a fairly even distribution of costs through its dataset and a comparative marginal worst case cost cap, No insurance will pay to fix a car where the cost of fixing is higher then replacement.

Where as health insurance has a very uneven distribution within its dataset and costs where they occur tend to be very very spiky, and unlike car insurance their is no cost "cap" where we opt to replace the person as opposed to fix them.

The spiky nature of health insurances cost distribution is what breaks the private model of health care financing. The risk pool has to be huge enough to even out the number line enough to stabilise the premium price, while at the same time avoiding an adverse distribution between insurance providers in a multi provider market.

y-intercept said...

RD, There is not an even cost cap to auto liability. I've been in only one auto insurance claim. In this claim, a kid stole his father's pickup truck and totaled seven cars in an afternoon of mayhem. The total cost of this incident was in the hundreds of thousands of dollars.

It is not uncommon for an accident to run up millions in liabilities. Driving a car into a crowd could generate a million dollars in medical expenses.

My guess is that you were thinking about collision insurance. There is a cost cap to collision insurance for the reasons you described. This insurance replaces at most one car.

Collision insurance is not required by Utah State Law.

As collision insurance is not required by law, your post does not explain why auto insurance is required by law and health insurance is not.

Collision insurance, with its cap on costs is not required by law. Auto Liability and that really bizarre No Fault insurance are required by law. These are required by law because all accidents automatically go through the courts.

y-intercept said...

PS: I edited the post to emphasize that I was talking about auto liability insurance.

In the version RD read, there was a garbled sentence where I started talking about the difference between liability and collision insurance.

Liability (which has a wild data set) is required. Collision insurance (which is tamed) is not.