One of the hardest things we humans face in our lives is making decisions, especially if some of the available options present a form of risk involved.
Managing risk, therefore, is hard, complicated, and not very attractive to most people. But, if done properly, it would never be just “gambling”, but a logical process with a positive outcome on average.
The experts at managing risk are insurance companies.
It is very likely that you know what an insurance company is. You probably are a policyholder yourself with health insurance coverage, whether because you got it on your own from a private insurance company, or because it was mandatory due to your country’s laws regarding national health care. Also, people can get insurance from the businesses they work in.
Insurance businesses are charged with the task of providing a reasonable coverage to people when a loss—in a specific form, depending on the policy—is present, or when the thing you applied coverage to has been stolen or damaged. Now, the range and the scope of this coverage depend on a number of factors. Since managing risk is so difficult, specifically because insurance companies (as well as any human being) cannot know everything, every time—we have a limited capacity to process information: we have a bounded rationality—, the insurance industry has the necessity to apply premiums to the people wanting to get insurance of any type.
And what is a premium?
A premium is basically an additional amount of money one has to pay to get a service, based on different factors. For example, insurance companies offer a wide range of insurances. They can be life insurance, health insurance, automobile insurance, property insurance, travel insurance, liability insurance, and many others (even including pet insurance!).
Depending on the type of insurance provided, certain variables are taken into account. In the case of automobile insurance, if it is the case that you’re a young college or university student with a brand new car and you’re looking to insure it, chances are you’re going to have to pay a pretty high premium for that to happen.
The reason is that insurance companies rely a lot on statistics and data. This is when an actuary enters the stage; an actuary is a professional that crunches data—which is basically analyzing it—, with the purpose of enabling insurance business to make better decisions regarding how much they should charge for premiums in specific population segments, etc.
In the case you’re this young student, what the data would probably show would be a tendency of teens and young adults of getting more car accidents, road accidents, crashes, or just car thefts due to leaving your car in an unsafe site, just to give a couple of examples. And no, this is not about you, is about the majority of the specific population you’re part of.
An interesting concept, which frustrates most companies working in the insurance industry, is that of moral hazard. Moral hazard basically means the impossibility of knowing every single little detail about the person requesting insurance. This person would probably try to portray him or herself as the most innocent, careful, and conscious person ever, if he or she is requesting automobile insurance, for example, just to get a lower premium and pay less.
And the paradox lies in the fact that this person can actually be who he says he is. But, after becoming a policyholder, his behavior can completely change. All of this caused by the incentives the person receives: he knows that, in the worst scenario, you “guardian angel” (i.e., the hired insurance business), will come to help you with partial or complete coverage.
Now, let’s enter into the provision of medical services.
From the economics perspective, the health care industry does not follow most of the rules in a normal market (and, well, honestly, there are some other markets like this, like the music industry where there is a supply surplus and it is getting bigger day by day). The health care industry is difficult to manage because of the costs involved. Medical doctors, nurses, administrative staff, among others, have to get paid at the end of the day, and all those years studying in medical school, with the following years of training and internship, and specializations in some cases, cannot be in vain. They require an offset sooner or later.
However, governments, as the main interested party in helping their citizens grow, and looking to provide as many public goods as possible (think for example about national defense and transport infrastructure, which necessarily have to be provided, coordinated and/or funded by the government to correct possible market failures and producing as much welfare as possible), are of course concerned with the health of people. And since health care can be so expensive, there is a necessity, almost in every country and region, to establish a strong care system that can be affordable and can reach as many people as possible within the boundaries of its territory.
In this sense, France is definitely an example to follow around the world.
France’s health care system, which depends on different insurers, has been labeled by the WHO as the best system on the entire globe. And there a lot of reasons that support this.
First of all, France’s national health care differs from what other developed countries have established within their borders. For example, the United Kingdom and its notorious National Health Service (commonly referred as NHS by the layman), is a socialized health care system, where the government takes care, and pays for almost everything—this includes the doctors that diagnose and treat, their incomes, the maintenance of hospitals, the provision of materials, tools, hospital beds, etc.
Then, you have countries like Canada which have adopted single-payer healthcare, where the government is limited, but still does most of the paying. Canadians have to pay for a lot of things on their own, like specific prescription drugs; and, sometimes, getting private insurance is totally necessary to pay less in the long run.
France, on the other hand, is also publicly funded, but non-profit insurance funds are also present and pay for a lot of health care providers. By doing this, these providers are able to function as private businesses, in contrast with the United Kingdom and Canada.
And it is working very well so far! If you stop a French in the streets of any city in France, it is highly likely that you would get a very positive reaction about his health care. They really love it!
And France accomplishes this only by using 11.7% of its annual national income (GDP or Gross Domestic Product). Now, this is not a low amount; in fact, France is one of the countries expending the greatest amounts of money on health care. When compared to the Organization for Economic Co-operation and Development (OECD)’s average, countries spend $3300 per capita, when France is expending more than $4000 annually on average.
Of course, this is nothing compared with the United States’ expenses on health care. With its Medicaid, Medicare, and additional expenses from the Affordable Care Act (or just Obamacare) from 2010, the US is currently spending more than 17% of its GDP in this sector, as well as more than $8000 per capita. This is huge, and the American people are not getting half of what the French have.
The French people are constantly trying to change their health care through laws to improve it, and as I mentioned, they truly love it; when, in contrast, the American people hate their health care system, and are stubborn and rigid when it comes to changing their system.
It must be noted that the French people do not rely entirely on the health care system provided by the central government. Since, in most of the cases, reimbursements account to 70% of the total expenses when visiting a medical doctor on average (as long as it is not a chronic illness, or something like cancer, in which case the reimbursement would be of 100%), it is very popular and common to find French people paying for Mutuelles. This Mutuelles are basically private insurance companies that are specialized in closing the remaining gap that health care does not cover.
And this industry is so efficient, that the competition between Mutuelles is truly fierce. If you watch French television and wait for a while for the commercials, you won’t need to wait much more: tons and tons of creative commercials about Mutuelles will start to appear, with the purpose of luring you to buy their services instead of the ones offered by the previous insurance’s commercial you just saw.
Regardless of the presence and necessity of private insurance businesses among the French, the reality is that visiting your physician because of flu, the cold you recently got, or because an annual visit was needed, the total amount one has to pay is not that much. Depending on the case and the branch of medicine in which the physician is specialized, the total amount charged can vary a little bit, but it shouldn’t surpass the €100 benchmark if it’s not something serious or severe.
This so common, that projections by the government estimate that approximately 85% of all French citizens are already policyholders from private insurance companies.
And the French health care system is truly diversified. It is funded not only from payroll taxes (an amount automatically subtracted from your monthly payment at your job position), but also from income taxes, and alcohol and cigarettes taxes, alongside frequent changes in the social security system.
But insurances are a big part of this because of what we have mentioned. The natural question is, therefore, how do they raise their money? Only from the premiums source?
The answer is mixed. In reality, insurance companies are really afraid most of the time, and compete both against each other, and also with financial services companies. In the last decades, due to the expansion of globalization, terrorist attacks, as well as deregulation across the globe, the insurance industry has undergone a lot of changes that have forced it to take new measures to continue thriving in an increasingly competitive global market.
Why buy a policy when you can go and invest, for example, in a mutual fund, and then use the gains to pay for medical expenses? This has been a question looming over insurers for a long time by now. That’s why they have started to offer products like annuities.
But the way in which an insurance company raises money is by taking all these premiums from their clients, combining them all together, and then, very carefully, proceeding to invest all this money in low-risk investments. In this way, these companies ensure a regular flow of money into the business to pay for any eventual coverage that may be necessary for some client.
Another important concept that should be tackled is that of reinsurance. It may seem like a paradox, but it isn’t, and it is completely legal, although strange. It consists of an insurance company buying insurance from another one. In this way, insurers that may have problems handling risk in certain situations now can start mitigating their risks by sharing it with other related businesses in their field.
As with any business, whether in France, the United States or Germany, the main indicator of a business’ general health, is its balance sheet. By carefully analyzing it and getting financial indicators or ratios out of the provided data (such as the acid test, to see if the company can effectively pay its short-term liabilities), one can infer if your insurer will be able to provide the promised coverage when the time arrives. You want to get a policy from an insurer with the lowest leverage possible; the insurer should not be writing a lot of insurance policies, should not be depending on reinsurance (as we mentioned), and should definitely not accumulate debt.
Finally, and talking about debt, nothing is perfect in this life. Despite having the best health care in the world, France still faces big budget deficits every year from the lack of necessary expenses in this field. Just in 2015, the reported health care deficit corresponded to an amount of €6.9 billion. Either now or later, the French government will have to face this issue head-on if it wants to ensure that France stays number one regarding health care for a long time, which is totally possible!