Wealth is generated through innovation. And, it is impossible to create an innovative insurance company.
Think about it. Insurance companies make money by analyzing risk, and taking premiums that add up to more than the cost of acceptable risk. The problem is that there's no way to be innovative about analyzing risk. When you analyze risk, you hypothesize a certain event and count the number of times the event occurs over time. As an insurance company, you have no control over what the event is, or any aspect of it. What you get is reams of data about the event, and the knowledge that such an event is undesirable. Think a broken leg. Insurance companies all know exactly what a broken leg is, and they all have reams of data which count the number of times people tend to break their legs over a given time. Then they take everybody's money and pay money to the people with broken legs. That's all there is to it. Color me second-rater, but it doesn't take a John Galt to do that.
The only possible way for an insurance company to be innovative is to be innovative about analyzing risk. However, the innovation involved here is extremely insignificant. Everyone knows what a broken leg is. It's public knowledge. It's very obvious. And unless you're a Mafioso, it's really really difficult to be innovative about the way people tend to break their legs. The best you can do is count the number of times people break their legs, and factor that into your mind-blowingly simplistic equation for generating profit.
The idea that insurance companies can operate as businesses in the free market is insidious and stupid. Insurance companies calculate risk and take premiums that exceed the cost of acceptable risk. We've already discussed how it is impossible to be innovative about calculating risk. You calculate risk, and if you have enough money, you're correct. That leaves two ways to create profit. Either you 1) increase the cost of premiums, or 2) don't pay out the money you're supposed to. Surprise surprise; this is exactly what health insurance companies were doing before Obama passed the Affordable Care Act. Critics of the Affordable Care Act say that it will kill business. Hopefully, they're correct, because insurance companies shouldn't be businesses. The free market doesn't apply to them. They don't deserve to make profit, because they don't innovate.
A good way to think about it is the difference between reading a book and writing a book. You don't deserve to generate a profit by reading books. It's the writers who sold you the books who deserve to generate a profit. Studying the empirical world is like reading a book. Creating new products is like writing a book. And the moment you turn risk-taking into an innovative endeavor, and begin writing books, you're no longer in the business of insurance; you're in the business of investing.
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