As we continue to circle around the topics of health care and health insurance, here are the readings for Friday’s Fun Day:
First, this excerpt from an 8/7/09 NY Times article by Ron Lieber, “Good Luck Getting Private Insurance for Unemployment“:
The latest figures from the Department of Labor show that 247,000 more jobs disappeared last month. And right about now, many of the people who had those jobs probably wish they had something more coming to them than some severance pay and a small check from the state unemployment department.
I’m talking about private unemployment insurance. The problem is, if they had wanted to buy themselves that insurance a few months ago — in the same way they can buy life or disability coverage — it would have been nearly impossible to find at any price.
Sure, Hyundai will let you return your car if you lose your job. And companies in a host of other industries are offering add-on coverage that can help you keep paying your bill if you end up unemployed. (I’ve noted several options, including an intriguing new one in student loans, below.)
But paycheck replacement coverage — a product that seems perfect for this economic moment — is scarce, if it exists at all.
How can that be?
John Hartline, an insurance industry veteran, asked himself that question several years ago. Products like this had come and gone, and Mr. Hartline wanted to create a new one that agents could sell to individuals. In the spring of 2008, he started PayCheck Guardian, and the product came with several restrictions that speak to why it is so hard to make money with this type of offering.
The pricing was simple enough at first glance. Pay $69.95 a month, and if you lost your job through no fault of your own, you would get $1,500 a month for six months.
There were a few catches. First, you could not collect on the policy unless you had had coverage for at least four months. Why?
“If we offered immediate coverage, people would get laid off at noon and call us at 1, or find out at 8:30 that they were getting fired at noon and call us at 9,” he said.
Customers who had cleared the four-month hurdle, then lost their jobs still had to be unemployed for 30 days before they got their first checks. Mr. Hartline worried that people out on two-week furloughs, say, would try to collect.
Even those restrictions were not enough to keep his underwriters happy, though. Mr. Hartline said his reinsurance provider, Munich American Reassurance, forced him to stop writing new policies in April of this year.
Why? It turns out that the biggest problem with private unemployment insurance is something that industry insiders refer to as adverse selection. That is a fancy way of saying that the people who take out this sort of policy are the ones most likely to need it.
“The potential set of policyholders are selecting against the insurance company, because they know their situation better than an insurance company might,” said Michael Schmitz, a principal and consulting actuary for the Milwaukee office of the consulting firm Milliman.
As a result, there is not the sort of risk sharing that occurs when insurance is mandatory, as it generally is with auto insurance, according to Steve Rulis, a vice president and actuary with Munich American.
Think about adverse selection and also think about the comment in the last paragraph about mandatory insurance, which is also a hot topic in the health care debate.
Second, download Martin Feldstein’s presidential address to the American Economic Association in 2005 (for the record, it’s also published in the American Economic Review, March 2005) and read the following excerpts. (Some of the language here is technical, but you should still be able to get the gist of his arguments.)
- Page 1 (stop at the bottom)
- Page 6 (start with “Why social insurance”) through page 7 (stop at the bottom)
- Page 27 (start with “Unemployment insurance”) through page 33 (stop at the part about Social Security)
Focus on understanding the gist of his arguments and his proposal. What do you think about it, and what sorts of ideas does it bring to mind about the health care debate?
PS. If you wish you are of course welcome to read the rest of Feldstein’s paper, which came in the heat of the debate about “privatizing” Social Security (and before the stock market took a nose-dive :). Lots to think about.
PPS. Feldstein was thought to be one of the three top candidates to take over leadership of the Federal Reserve when Alan Greenspan retired in 2006. Ben Bernanke was the lucky winner; Felstein was arguably an even luckier loser, and so was Glenn Hubbard, whose students at CBS—Columbia Business School—made this terrific consolation-prize video.