Introduction Definitions and Basics
● Insurance, from the Concise Encyclopedia of Economics
● Insurance plays a central role in the functioning of modern economies. Life insurance offers protection against the economic impact of an untimely death; health insurance covers the sometimes extraordinary costs of medical care; and bank deposits are insured by the federal government. In each case a small premium is paid by the insured to receive benefits should an unlikely but high-cost event occur….
● An understanding of insurance must begin with the concept of risk, or the variation in possible outcomes of a situation. A’s shipment of goods to Europe might arrive safely or might be lost in transit. C may incur zero medical expenses in a good year, but if she is struck by a car, they could be upward of $100,000. We cannot eliminate risk from life, even at extraordinary expense. Paying extra for double-hulled tankers still leaves oil spills possible. The only way to eliminate auto-related injuries is to eliminate automobiles.
● Thus, the effective response to risk combines two elements: efforts or expenditures to lessen the risk, and the purchase of insurance against the risk that remains. Consider A’s shipment of, say, $1 million in goods….
● Liability, from the Concise Encyclopedia of Economics
● Until recently, property and liability insurance was a small cost of doing business. But the substantial expansion in what legally constitutes liability over the past thirty years has greatly increased the cost of liability insurance for personal injuries….
In the News and Examples
● Social Security is not the same as insurance: Social Security, from the Concise Encyclopedia of Economics
● For most of its history Social Security has been financed on a pay-as-you-go basis. With pay-as-you-go financing, benefits to retirees and other beneficiaries are met by current taxes on workers; income roughly equals outgo, and assets do not accumulate significantly. Pay-as-you-go Social Security systems have large unfunded liabilities….
A Little History: Primary Sources and References
● Health Insurance, from the Concise Encyclopedia of Economics
● In the thirties and forties a competitive market for health insurance developed in many places in the United States. Typically, premiums tended to reflect risks, and insurers aggressively monitored claims to keep costs down and prevent abuses.
● Following World War II, however, the market changed radically. Hospitals had created Blue Cross in 1939 and doctors started Blue Shield later….
● Alternative prepaid programs, such as health maintenance organizations (HMOs) (under which total charges are fixed in advance) emerged as competitors to traditional fee-for-services medicine (under which charges rise with usage by people in the covered group)….
● Thus, the effective response to risk combines two elements: efforts or expenditures to lessen the risk, and the purchase of insurance against the risk that remains. Consider A’s shipment of, say, $1 million in goods….
● Lack of health insurance. One problem is that about 34 million Americans do not have health insurance, and their number has been rising. At least two government policies have contributed to this problem and made it much worse than it needs to be….
● Unemployment Insurance, from the Concise Encyclopedia of Economics
● The United States unemployment insurance program is intended to offset income lost by workers who lose their jobs as a result of employer cutbacks. The program, launched by the Social Security Act of 1935, is the government’s single most important source of assistance to the jobless….
