Insuring Insurance

Insuring Insurance

A month ago I wrote a story about self-insuring, aimed mostly at the business of buying insurance on travel and discretionary purchases or “toys”. I have a very different topic to consider today and it’s based, as always, on something I’ve recently read about the state of the insurance industry during the Coronavirus crisis. The Wall Street Journal reports that there is increasing pressure on insurers to broaden their policy protection to not exclude losses from a pandemic. This is a very strange request. It is akin to telling an insurance carrier that it has to allow for a property insurance policy that specifically excluded fire damage to suddenly include the damage because the house is now on fire. I have little overwhelming sympathy for most insurers that use loopholes to exclude claimants in times of dire need, but this is a very different case. These companies actuarially priced their coverage to exclude the risks of a global pandemic and now they are being asked to ignore that. That is not only not right, it is downright hazardous to all of our health going forward.

There are few industries that will be hit harder by this pandemic than the insurance industry. The good news for them is that their business can largely be conducted on a virtual basis (though some physical inspection will still be required in the case of property and casualty losses). But between business interruption, liability claims, medical malpractice, health and life claims, the entire industry will be reeling for years to come. Unlike, say, the hotel industry, which will shut down for a while and then restart and have a finite yet permanent loss of revenue and related shut down and start-up costs, the insurance business has what is often called a very long tail to it and this pandemic promises to be one of the longest tails in history given all the dimensions of loss that are arising from it.

We are all quick to suggest that Airlines that engaged in lucrative buybacks and paid big incentive payments to their leaders as things improved enough after the last crisis, should have their bailouts controlled with anti-enrichment and abuse stipulations. And let’s face it, there are few businesses other than perhaps banking and utilities that rank as low on the totem pole of public sympathy than insurance. But here is the thing, you can argue that insurance is sold, not bought, and that it is therefore less necessary than not, but that is simply not true across the board. I, like most of us, tend to think that the lobbying efforts of industries like insurance have created massive tax loopholes for the industry to assist in the selling of their product, but there is a reason the legislators have gone down that road. It is not all about corrupt politicians and efficient lobbyists. The underlying basis for risk-sharing is a tenet of modern civilized life.

We have all seen the scenes of that quintessential slice of Americana called a barn-raising. Hell, even the Uber-conservative Amish engage in the highly socialistic activity of having the community pitch in to rebuild a burned barn for a farmer that would otherwise lose his harvest. This is nothing more than a risk-sharing practice that has everyone in the community forfeit some of their time and materials for the collective good with the knowledge that there may come a time when he, himself needs similar help. The basic human tenet of the Golden Rule stands at the base of this, that you should and will do unto others as you would have them do unto you. The world is harsh and even sophisticated gaming theorists like John Nash (A Beautiful Mind) anticipated that the collective would often be better off through cooperation versus raw competitive instinct. In a pure capitalistic world, those farmers should be glad that their friend is impaired since his harvest diminishes the value of their crops. But man has learned through harsh experience that there but for the Grace of God goes any of them at any time. And with such harshness they might rather not endure.

Thus was born insurance. It has two primary outgrowths in property & casualty on the one hand and life & health on the other. Yet they are both driven by the actuarial laws of large numbers. I find it funny that laymen think accountants are numbers people when, in fact, accounting is mostly about business concepts. But actuaries are truly numbers people. The entire profession, one of the most lucrative and consistently in-demand in the world, it all about mathematics and statistics. This has only become more so in the last thirty years as the worlds of finance and insurance have merged increasingly in the dark stochastic arts of uncertainty.

That is the fundamental basis for insurance; uncertainty. There is very little uncertainty in many simple businesses, but insurance surrounds itself in uncertainty and takes pride in finding a mathematical path through that dark forrest. And at this moment in history, insurance stands on the precipice of the deepest, darkest jungle that exists. If you can imagine all the uncertainty you or I feel at this moment of this Coronavirus crisis, take that and multiply it by 1,000 and that is the uncertainty faced by the industry at this moment.

While we are writing our premium checks or arguing with a claims adjuster over the replacement value of a car that has been totaled, we are not at all certain that we really need insurance in its current form. But we do. And most of us know it. When we were young, maybe we thought there was no problem being carefree and willing to take risks, but as we get into life and realize that no one will let us drive a car or buy a house (at least not a house with a mortgage), we begin to better understand. Insurance is perhaps one of the great democratizing agents that exists in a capitalistic world. It is the risk-spreading mechanism that allows everybody, no matter what their wealth or status, to drive a car and own a home (again, with the pleasure of a thirty-year mortgage) and to do that in a manner that is acceptable to society. That is a society that doesn’t want to face losses at the hands of people without wealth to back up the risks they take and the outcomes that befall them.

The modern world needs insurance. It is not to protect the rich, but rather to free the poor so that they can function in the modern world and have a chance at prosperity. Coronavirus may kill hundreds of thousands or even millions and the world will survive. It will be a lesser place, but it will survive. If Coronavirus succeeds in killing the insurance industry, we will all be thrown into that deepest darkest jungle that it faced. Because without insurance, the modern world becomes even less egalitarian than it is today and that, would be a tragedy for the ages. We need to insure that insurance continues to exist.