Thursday, July 12, 2007

Today the Governor announced plans to try and prevent insurance companies from basing increases in health insurance premiums on changes in the insure health, which is about the same as saying an insurance companies can not base auto insurance on the drivers history of accidents or tickets or housing insurance on the home location and if it in area that prone to flooding, fires, hurricanes, tornadoes, ect. Since Insurance is protecting an individual against a possible negative event from happening to them, an actuarial fair premium is equal to the cost of the negative event times the likely hood of it happening spread out over the time period of the policy. So a person with a higher likely of the negative event happening to them should pay more and some with a lesser change of the event happening would pay less. Since Insurance companies do not have access to perfect information on the likely hood of something happening they have to use information like a person health history and other risk factors to decided on the premium level, and usual people with lower risk end up paying more and people with higher risk pay a little less than they should because of the information asymmetries inherent in life forces insurance companies to pool clients together so that they can cover there pay outs with the premium coming in from a diverse group of clients some that are low risk, some that are medium risk and some that are high risk, ect, few insurance companies actually make much, if any of there profits from people paying in more in premiums than they pay out in claims, most of them make it from investing the premium during the time periods before they make pays outs.

If Governor Blagojevich gets his way and insurance companies can not use a person health history or changes in deciding premium levels the end results with be that people that are at low or medium risk will end paying an even higher rate than should to balance out people that are in higher risk groups that are no paying even less than they should. Those people that are in the highest risk groups and could benefit the most from insurance will end up having even hard time finding companies to insure them since it will be more difficult for those companies to charge them anything approaching a fair premium and most of them will not want to pass on to much of the cost to lower risk clients that may responded to large increase in their premiums by getting rid of their insurance or moving to lower premium companies and no insurance company can stay in business just covering high risk clients. While the Governor may claim that he is working to help families in Illinois, in the long run if he gets his way he will be making it hard for them to get insurance all together if they are in high risk groups.

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