This article covers my position on establishing a new National Insurance Fund as one reform of our overall financial system, including the elimination of the Federal Reserve and the dispersal of its various powers across various governmental branches and departments. This National Insurance Fund proposal is tightly related to my overall vision for financial reform covered in separate articles. This includes my proposals for Monetary Reform, a National Credit Union, and a National Credit Bureau. All of these various reforms are also closely related to my views on inherent natural monopoly industries and the crucial need to operate such sectors of the economy as transparent bureaucracies with strict democratic oversight in order to ensure a fair and level field for all other businesses and consumers. There are only a handful of such natural monopolies, but if we continue to allow them to be run by private for-profit oligarchs, we will continue to watch our democracy fade away.

The National Insurance Fund provides a single risk pool for the entire nation across all common risk categories. This includes such basic risk funds as auto insurance, homeowners insurance, renters insurance, building insurance, life insurance and so forth. Coverage would be offered for fire, casualty, theft, and floods. For these types of insurance broad choice can be provided to allow policy holders to select between higher premiums and lower deductibles or lower premiums and higher deductibles. The large economies of scale from shared overhead and greater pooling of risk means the costs can be kept much lower than any privately managed insurance funds. Moreover many privately managed insurance funds view the pooled fund of the policyholders itself as their own capital and measure their profits against the fund that rightfully belongs to the insured and not the insurance administrators. So these private administrators reward themselves when they can bilk the policy holders out of the benefits they pooled their risk for in the first place.

The National Insurance Fund can also provide key risk pools for the other sectors of the public financial system. For example, the various credit system risk pools of the National Credit Union would be provided through this National Insurance Fund. This includes several risk pools for the National Credit Union such as: loss-of-income debt-service insurance, loan-default insurance, early-loan-repayment insurance, savers short-term value-loss insurance and so forth. For the monetary system, the National Insurance Fund will provide risk pools for transaction authorization fraud and merchant disputes. Similarly the flood insurance currently offered by FEMA would be made a part of the National Insurance Fund.

Aside from these usual risk pools, the National Insurance Fund also allows new forms of insurance that private insurers would never provide. For example, farmers currently rely on put options and other derivatives to hedge against the uncertainties of the prices of their agricultural product. However, due to the fundamental role of food production to our economy it makes far more sense for the entire food consuming population to hedge those uncertainties on behalf of the agricultural producers. This makes sense because: 1) agricultural production is a relatively small portion of the economy; 2) everyone needs to consume agricultural products; and 3) the uncertainties of weather and climate are otherwise unfairly borne by only the agricultural producers.

Insurance Fund Administration

Insurance funds are quite simple things. Actuarial calculations must be developed to statistically determine the obligations of the insurance fund over time. In addition to actuarial work, the other key component of administering an insurance fund is to minimize fraud. Private insurance administration offers no particular advantages in the area of actuarial calculation and fraud avoidance over a public monopoly. Even for those that insist that the private enterprise does have an advantage in these areas, then we should simply contract out the actuarial services and the fraud prevention services and still pool all our National risk into one big insurance fund. There is no reason to institutionalize insurance fraud and allow oligarchs to skim money out of the fund.

Many of the problems – adverse incentive and adverse selection problems – faced by private insurers can be reduced or even eliminated in the case of a National Insurance Fund. When coverage is universal, the problem of adverse selection is largely eliminated. Adverse incentives can be reduced in the same way current for-profit insurers reduce it though the judicious use of co-payments, deductibles, and other out-of-pocket expenses.

While the risk pools of the United States can be broken apart and run as several separate oligopoly insurance funds, this does nothing to serve the insurance needs of the population. It merely creates an enormous sector devoted to shifting policyholders from one policy to another with little, if any, difference in coverage or premiums. A single fund has the ability to lower premiums significantly so that nothing is gained by competition which is not a cost reducing competition in the insurance sector, but instead a cost raising form of competition as insurance companies spend more and more on advertisers and brokers to capture more of the market and achieve greater monopoly profits. However, the greater efficiencies from greater economies of scale are squandered away in the form of greater overhead expended on sales agents, marketers, benefit denying claims adjusters, advertisers, and so forth.

What is an insurance fund?

An insurance fund is merely the pooling of risk. In other words the policy holders all pay in funds in an amount actuarially determined to create enough annual income to make expenditures covering the catastrophic risks over the year. Private oligopoly insurance companies – in selling us insurance policies – basically take from us what is ours (our own funds), carve it up in various ways and sell back to us what we already own. For this rote task they expect to profit greatly – skimming off the top of the fund as much as they can. An insurance fund rightfully belongs to the policy holders. We policyholders simply need some routine services such as: actuarial calculations, premium receivable and collections, and benefit disbursements. The question of claims adjusters can remain a private for-profit service or we could deploy a combination of private and public claims adjusters.

So the private for-profit insurance company itself believes itself to be justified in skimming money off of the top of the fund: to the greatest extent they can achieve. Yet when the other participants in the fund try to do the same thing, it is called fraud. Therefore the very for-profit approach to insurance breeds resentment and adverse incentives. The insurance companies try to sell us feel-good advertising to get align our incentives to that of the fund, while they simultaneously work against the interests of the fund by trying to take as many lucrative payoffs for themselves as possible. The first step in aligning incentives is to remove the institutionalized insurance fraud that is unavoidable in private for-profit insurance.

Much community rating constitutes cheap gimmicks by insurance providers since one can often witness statistical correlations in any two phenomenon, and though a statistical correlation exists, such correlation often does not warrant any compensation or punishment to various communities. Similarly for experience rating. These gimmicks are used to hone their actuarial market segments, where one fund tries to cherry-pick customers of another fund through feel-good advertising where they will get temporarily lower rates, but still subsidize greater profits.

The first step in eliminating adverse incentives from an insurance fund is to eliminate the for-profit institutionalized insurance fraud from the fund. While we do want to induce people to behave in ways more in line with the needs of the community, the private for-profit insurance providers actually fosters an adversary relationship between insurer and insured.

Best to foster considerate and defensive driving; reduced driving; accident avoidance in driving and generally; healthy eating, exercise, and recreational drug-use habits; workplace and recreational safety; security awareness and precautions; fire safety awareness and precautions; devoted, dutiful, and responsible behavior. Private insurance actually fosters the opposite of this by encouraging adversarial behavior and resentment for the monopoly profits they steal from us and the other malicious policies they impose upon us.

By relying heavily on benefit denials, high deductibles, high co-payments and so on, the private for-profit insurance companies actually transform us into Pavlovian animals that only respond to pecuniary incentives. Instead we must raise awareness about risks. Then a we must rely on community relations to instill a sense of obligation to the community. It is not enough to simply raise awareness about the benefits of careful defensive driving, we must also create a cultural climate where we all want to meet and exceed our community’s expectations. When private insurance companies attempt to use advertising and corporate communications to instill such a sense of duty to the insurer, it cynically cheapens the very community cohesiveness and duty we want to foster: undermining the genuine promotion of community obligation.

Policy issues for deliberation

  • what specific risks to insure
  • what specific risks private insurers may insure (whether in competition with the National Insurance Fund or as complimentary insured risks not covered by the fund)
  • for each specific insured risk, whether to allow or impose:
    • annual or lifetime limits
    • deductibles
    • co-payments
    • maximum out-of-pocket limits
  • experience rating criteria and formula
  • how to support the fund for different categories of insured, such as through:
    • general taxes
    • dedicated taxes
    • premiums (user fees)
  • whether to structure price/premium discrimination or proxies
    • income proxy for price discrimination
    • discounts for children, elderly, disabled, students, military (often assumed to be income or price discrimination proxies)
    • volume discounts
    • family discounts
    • etc.
  • whether and what fund-specific community rating premium discounts to offer or impose
    • for example safe driver discounts, premiums proportional to annual driving time and driving distance, age varying premiums, gender varying premiums
    • red-lining and other geographic criteria (should an insured person be penalized for living in a high-crime area or is it not fairer for such risks to be pooled across all areas)

Insurance fund specifics

The National Insurance Fund can provide a locus to pool risks for all sorts of insurance, including:

  • Health
  • Disability
  • Life (a minimal universal fund to cover basic funeral and remains plus others covered by premiums)
  • Building (including homes and businesses)
  • Renters
  • Vehicle
  • Malpractice
  • Financial
  • Monetary
  • Agricultural High-Yield

The National Insurance Fund in providing insurance for these various life and property would likewise insure against various risks to the insured such as:

  • Casualty
  • Fire
  • Flood
  • Theft / Burglary
  • Liability
  • etc.

Some types of insurance would be covered through dedicated tax funds such as the current payroll tax for Social Security’s disability insurance or Medicare’s elderly healthcare insurance. Other forms of insurance would be paid for through premiums just like the current for-profit private oligarchical insurance system. This includes automobile insurance, homeowners insurance, and renters insurance. Still other risk funds would be covered through other means such as the interest rate premium and interest discounts assessed by the National Credit Union in its role as a credit intermediary.

Community Rating (and adverse selection)

Community rating is a mechanism used in insurance to differentiate various communities of insured persons and try to more accurately assess the actuarial risks associated with that community. For example the community of motorists under 25 years of age exhibit a greater statistical likelihood of involvement in vehicular accidents than those over 25 years of age. Similarly, building and homes near a firehouse show a lower inclination toward fire damage than those buildings and homes that are distant from a firehouse. Often the various community ratings are little more than marketing gimmicks that dole out rewards and punishments to various people who have no control over the clique in which the insurance company pegs them. Obviously an 18 year old can do little to become 25 other than be patient. While some homeowners can move closer to firehouses, there are always limits and someone has to live the furthest from the firehouse. And so it is a legitimate question of public policy – of democratic deliberation – whether once a statistical and actuarial regularity has been identified, whether certain communities should be punished and other communities rewarded for their inherent and unavoidable membership of a community. Yet the allowance of private for-profit oligarchical insurance companies allows such democratic decision-making to be taken from the people.

Community rating can help avoid adverse selection where those from communities needing insurance more because they are at greater risk tend to purchase insurance more than others. In other words some will select insurance in a way that is adverse to the interests of the fund. By delineating among various communities of insured, adverse selection can be reduced. Another way to reduce adverse selection is to provide universal coverage. Once everyone is covered the problem that some facing higher risks are insured by the fund is balanced out by others who are facing much lower risks and also insured by the same fund. While universal coverage is legitimate for public monopolies such as national defense, the constitutional basis of mandated coverage for private monopolies is highly suspect.

Experience Rating (and adverse incentive)

Like community rating, experience rating is another attempt to fine-tune the actuarially calculated risks between one policy holder and another so that the rates paid by policy holders has some relation to the risks to the fund added by that policy holder.

Many of the criteria used for experience rating are properly included in the realm of democratic deliberation. An actuarial can tell us the statistical correlations between those who have significant driving experience and those who have never driven before, but the actuarial cannot answer the question as to whether we should penalize new and unproven drivers due to this correlation or how much such drivers should be penalized.

Experience rating is particularly useful in reducing adverse incentive where the insured now have an incentive adverse to the risk fund because their mishaps will be covered by insurance. Therefore imposing experience rating on drivers keeps drivers from recreationally joining in a smashup derby because they know their insurance premium will rise even though the insurance benefits will repair all of the damage. A similar form of experience rating would have prevented the recent home mortgage crisis since the credit default swap derivatives were sold as insurance for bad mortgages, but the mortgage brokers who sold those bad mortgages were not experience rated. It was as if those who loved joining into smashup derbies could buy auto insurance without experience rating. Such a possibility is clearly ripe for abuse.

Experience rating is often complemented by deductibles, co-payments and other out-of-pocket expenses to reduce adverse incentive and align the incentives of the insured to the interests of the collective fund.

Actuarial Criteria

So while actuarial criteria for insurance funds can be thought of as fairly rote and decisive, it is important to understand that simply because a statistical correlation has been identified, that does not mean that a fund must or even should reconfigure premiums to reflect this actuarially identified pattern. We will likely find risk correlations for burglary tied to the race of the insured, however we have laws against race discrimination and it is therefore illegal and inappropriate to force different races to pay different premiums simply because this statistical correlation has been identified. Instead we should recognize that the racial and income segregation of our neighborhoods cannot be used a a justification to further discrimination of those neighborhoods because their forced segregation also imposes on them a burden of more burglary or shorter life-expectancy and so forth.

Authorized Claims Adjusters

The function of insurance adjustment is necessarily a decentralized function. It is important for adjusters to arrive on the scene to assess the likely covered damages, investigate the causes of damage and record the state of affairs as near to the calamity as possible. While the National Insurance Fund will employ its own claims staff to verify adequate documentation has been collected for each claim, the task of claims adjustment should largely be handled by National Insurance Fund authorized adjusters.

Authorized claims adjusters would be either private independent contractors who preform these crucial functions and report their findings to the National Insurance Fund or county and municipal or community non-profit employees who supplement the work of police and fire inspectors to provide investigations of other casualty events.