Evil Insurance, Evil Us

I’ve heard it said that health insurance companies are evil.  They deny people care when they are sick and they deny the sick insurance.  They create a headache for all with their utilization review, managed care, denial of benefits, and required pre-approvals.  They drive a wedge between the doctor/patient relationship. For any blogger they are an easy target.

But why “Evil Us?”  Before I go there let me define a few terms that will help explain my accusation.  Hold on.  The first is “concentration of costs.”  A very few of us spend the majority of the money in health care.  The top 1% most expensive Americans use 22% of the health care dollars.  The top 2% use 33% of the health care dollars.  The top 5% use 49% of the health care dollars, and the top 50% use 97% of the health care dollars.  That means that half of all Americans only spend in total 3% of the health care dollars (Zuvekas and Cohen, 2007).  The concentration of spending at the top has immense repercussions throughout all health care policy debates.  For insurance companies this leads to a term called adverse selection.  This phenomenon is the bane of the insurance company.  The single easiest way for an insurance company to be profitable is to avoid the people at the top of spending curve, and the easiest way for an insurance company to fold is to have a disproportionate share of the most expensive health care users.  However, the insurance companies do not have accurate information on who is high cost and who is low cost.  The consumer, likely does know if they are high cost or low cost (are they likely to use the health insurance or not?).  This is called asymmetry of information.  Anyways, guess who is more likely to seek health insurance?  You got it.  The high cost person.  So what do insurance companies do?  They raise premiums for everybody so that they can cover that potential high cost person.  So what does the low cost person do?  You got it.  They think, “Wait. This insurance thing is too expensive.  Why would I pay $9,000 a year when I only use a few hundred dollars of care a year?).  So in any given pool of insured people the low cost people are more likely to drop the insurance and the high cost person is more likely to hold on for dear life.  That is adverse selection.   So this pool with low cost people jumping ship (possibly to a newer and lower cost plan) and high cost people hanging around for dear life (remember once they are high cost no smart insurer will touch them) the costs to the insurer rises.  What does the insurer do when it is time to renew?  You got it?  It raises the premiums.  More low cost people jump and high cost people hang around.  This continues to happen until only high cost people are left and premiums are astronomical.  It’s called the death spiral.

Back to why we are evil.  The low cost person (which I am one) is constantly looking for the better and cheaper plan filled with other low cost people.  It is in their best interest to be with low cost people.  But their self-interested actions make health care for the people who actually need the care unaffordable.

So is the insurance company evil for charging higher and higher premiums to its members in these high cost pools or avoiding the high cost people all together?  Is the low cost individual evil for jumping ship and placing the burden on the high cost people?  I actually think that neither is the case, but it seems that in our current system when everyone acts in their best self-interest the people that need care are the ones who lose out.  Maybe its just the system.

(Quick note:  This phenomenon I described above is true for the individual and small group insurance markets and is not true for the large group insurance market.  I can explain this later if people are interested)

Zuvekas, S., Cohen, J. (2007). Prescription drugs and the changing concentration of health care expenditures. Health Affairs.      Volume 26, number 1.


20 responses to “Evil Insurance, Evil Us

  1. This was very interesting information. The broad disparity in the consumption of health care services is not dissimilar to the disparities that exist with the insurance of other risks. The reason that two of the largest property insurance companies in the US have “farm” in their names is because State Farm and Farmers built a base of insureds who were farmers, who experienced lower risks than their city-dwelling counterparts. With that base, they were able to eventually add city folks to the pool and have their large base of low-risk farmers help to shoulder the risk.

    We currently have a government-backed insurance program to ensure that all Americans have access to subsidized flood insurance. Those who need it the most…actually, let’s instead say those who USE it the most…are those living in flood planes, i.e., those who have chosen to live in harm’s way. As a consequence, we are, even now, re-building homes in New Orleans using flood insurance payments so that people can resume their residency in a known, hurricane-exposed area.

    I’m a big fan of America’s freedoms and feel that everyone should have the right to pursue happiness whenever and wherever they want. But when they do it at my expense, as is happening with the continual reconstruction of Gulf homes insured by Federal flood insurance (i.e., paid for by my taxes), I’ve got a problem with that.

    As with flood insurance, some individuals CHOOSE to expose themselves to known health risks that then become a significant burden for insurers and for other members of the insured pool. If a risk is unavoidable, such as a genetic predisposition to a given illness, then all risk pool members should be willing assume the expense. But when the risk is avoidable, such as lifestyle risks (smoking, et al), then perhaps we need to have a separate risk pool which has correspondingly higher premiums.

    lpaul, when you say, “…the people that need care are the ones who lose out,” you need to acknowledge that a sizable percentage of these “needy people” are victims of their own irresponsible actions and are undeserving of the pity that your statement seeks to generate. Charging premiums based upon the lifestyle risks to which insureds choose to expose themselves would substantially reduce health care costs for responsible individuals and would encourage a greater focus on health maintenance.

    How ironic that smoking rates are higher among the poor; they can’t afford health care insurance but they’ve got enough cash to support a smoking habit and its associated health care costs.

  2. BP: Thanks for responding to my posts of a few days ago, regarding my client. I appreciate that you see that many people fall into the category of “victim”, which he certainly does. He is living a very meager life on many accounts due to his illness, only one of which is his lack of access to health care, because of lack of access to insurance. I also agree that there are people who invite health problems into their lives by their life styles. For instance I have trouble understanding why the nation often stands in paralyzed gaze when a mountain climber gets in trouble. Rescue workers then find themselves risking their lives to save his/her life when the climber made the choice to take a major risk. But then again, there are people who make a life of studying perceived risk. The risk I am willing to take, you may not be; and the risk you are willing to take I may not be. Driving a car is a very risky thing to do, but most of us do it, with very little thought of the actual risk each time we get in a car. I don’t think the human race could stand being that anxious.

    You seem to be focused on life style choices that are related to addictions. And from your personal disclosures your life has been negatively impacted by people close to you who have such problems. That is a very hard position to be in – trying to help but wondering if your help will actually be enabling them to continue their addiction. Professionally, I struggle with this dilemma all the time.

    I’m astounded, however, by how little the medical/mental health field understands about the brain and addictions. ( I include food addictions) We are certainly learning more, but the more we learn the more questions arise about how different – genetically, environmental, experientially- individual brains can be (even among twin sisters). It’s not immediately profitable to do research on these health questions. Research seems to be driven largely by the development of medications, not by the study of basic, underlying questions of what makes a person healthy.

    I wonder if we focused more on prevention and health, we might not end up spending many fewer dollars on medical care and health insurance.

    lpauls – have you found any statistics on what percentage of patients are “victims of their own irresponsible actions”? Can that even be determined ? It would seem one of the easiest would be lung cancer by those who are first-hard smokers – but then we couldn’t determine the effects of second-hand smoke, broader environmental factors such as car emissions, living in poorer neighborhoods that abutt interstate highways or near industrial complexes? How would one every determine who was worthy of compassion?

  3. I don’t have specific number but certainly could find some. However, I believe the number would say something like such and such percent of lung cancer cases are caused by smoking (probably a very large percentage). This number gives the public health official ammunition to try to lower smoking through taxation, smoking cessation programs, or throough any other means, but it gives the insurer/ the government employee little information determining wether John Doe’s lung cancer is caused by smoking, second hand smoke, genetic facators, or just pure dumb luck. I aslo could give you pediatric asthma rates in certain neighborhoods that are through the roof and conclude that it is because of a bus depot in the neighborhood (East Harlem) or traffic due to bridges (East Harlem again), or poor building stock with cochroaches and rats (oh, East Harlem again), or because those kids don’t have access to doctors and regular care which asthma requires (and yes, East Harem again). Or maybe it is second hand smoke, obesity, and bad eating haits (all high in East Harlem).

    So how do you calculate what is irresponsibility, enviromental factors often due to “not in my backyard” mentality, or other factors. Should the insurer pay for a percent of a cancer patient’s health care costs because they smoked? Maybe 90% if they smoked for 5 years before they were 25, 80% if they smoked for 8 years before they were 30, and 70% if they smoked for 10 years before they were 35. And if they are still active smokers then nothing. Is that how we would do it? I understand the frustration of paying for avoidable health care costs, but how would you possibly determine this across the board? Sure there are cases that are obvious, but that is a small percentage. Life is too complex to figure this out. I can’t imagine the number of cubicles, man power, lawsuits that would be generated from such a scheme played out to the fullest. Health and lifestyle choices is not quite as clear cut as whether someone lives in a flood plain.

  4. Lucas, I would agree that “Life is too complex to figure this out” in any precise way. But if we can identify 60% of the avoidable expenses 80% of the time, then we’ve almost cut our health care costs in half.

    Some health care plans are already giving rewards to insureds based on meeting or progressing toward BMI goals. And if I’m not mistaken, it’s possible to identify smokers (at least pack-a-day and above) as distinct from those exposed to second hand smoke. Various illnesses caused by alcohol can typically be identified and testing for illicit drug use is well established. None of these are foolproof. For example, Arnold Swarzenegger and other athletes would exceed the BMI standard but appeals could allow for evaluation of such cases.

    DGP, your questions about identification of addictions gets into some very confusing issues. Sometimes it seems that psychologists would have us believe that every undesirable behavior is a disease worthy of treatment (by them, no doubt, at an exorbitant rate). As a former smoker (eight years, quit 36 years ago), I’d be the first to maintain that quitting was easy. I did it countless times…only to start again. But because I was ultimately successful in quiting, did I just have a habit while others have an addiction? Where do you draw the line? In counseling managers on how to distinguish between ability and motivation, I used to ask rhetorically, “Could your employee perform the task if you put a gun to his/her head?” And yet some smokers resume their habit immediately after getting a triple bypass; maybe a triple bypass simply lacks the perceived certainty of death that a gun would provide.

    In any case, I think whatever injustices would be done by assuming free will would be more than offset by the motivational impact on those exhibiting bad health habits. And most of the insurance incentive plans provide counseling assistance in dealing with weight loss, smoking cessation, etc. Whether it’s sufficient to overcome addictions could be debated. But I’d maintain that the benefits of discouraging unhealthy lifestyles is well worth the effort. And it would help to stem objections from whiners like me who complain about having to foot the bill for people who are causing their own illnesses.

  5. I for one have never, ever called insurance companies “evil.” My epithet of choice is “dirty racket.”

    I found this post really helpful in that it addresses some of the complexity resulting from the dialectic between corporate and individual realities. I see two separate problems identified: first that the ostensible reason for insurance (to provide access to health care for the insured) is different from the actual reason the company exists (to make a profit). This basic issue suggests to me that health care is not a proper “product” for consumption in a free market because, as this post makes very clear, it is inevitable that some people will be left out (and that these are likely to be the very people who need it most further underscores that something is structurally wrong with the system). The second issue is more subtle but I would call it a lack of community. Everyone makes a decision about insurance based on consideration of personal circumstances, without regard for the collective effects of this kind of individual decision making. Why? because the “community” of insured people is an invisible one. We don’t consider other people in this decision because we don’t know the other people insured by our company, will never meet them, and the only thing we have in common with them is that we, separately, came to the same decision about insurance for whatever reason. So we feel no responsibility for the other. Maybe they make bad decisions about caring for themselves, or maybe they don’t–how would we know, we never meet or see these people, so even this question only gets asked in an academic sort of way, because it doesn’t matter. We don’t feel any more responsibility to consider victims of genetic fate as the reckless smoker when we make a personal financial decision about health insurance because both are equally absent from our sense of community.

  6. JTB, it appears that our educational system has failed you, as evidenced by your lack of understanding of the fundamental processes whereby a market allocates scarce resources. Using your logic, it must be surprising that you haven’t learned about this, since unlike the insurance industry, our public schools don’t exist to make a profit but rather to educate us. Yet despite this alignment of goals, they didn’t get the job done in your case.

    The fact that Apple exists to make a profit doesn’t interfere with its ability to develop and distribute a continuing array of cutting-edge products. And the driving force behind that is competition. Apple wouldn’t be able to continue to make a profit if it allowed its competitors to steal business by making better and/or cheaper products. That’s what has allowed American businesses to excel: free markets with limited regulation and substantial competition.

    You state that the ostensible reason for insurance is to provide access to health care for the insured. But in fact, insurance companies are in the business of sheltering people from risk; in the case of health care, it’s the risk that they may become ill or injured. And the insurers realize that unless they can provide this service efficiently and effectively, another insurance company will come along and take their business. (Because our laws mandate that no one can be denied basic health care, hospitals have taken to refusing care for the uninsured except where legally required and this is what has turned insurance into a prerequisite for care.)

    I’m a former HR VP for a telecom company. I was involved in assessing ways to get the best health insurance plan for our employees. If the plan was too expensive, then it added to our cost structure and impaired my company’s ability to compete and be profitable. If the plan was too restrictive in its coverage or failed to provide promised benefits, then our employees would complain, lose confidence in management and possible quit, again hurting our competitiveness and profitability.

    As to your contention that lack of community is a problem, your thoughts are similar to the observations made by Karl Marx over a century ago. He felt that by having everyone work for the collective good, society would be more efficient and everyone would benefit. How can it possibly make sense for twelve different car companies to invent their own version of an air bag? What a waste! But we have yet to establish a communistic society that can outperform those based on each individual pursuing their own self-interest, without regard for the common good. Maybe you’ve got a model that will allow that to happen. But I tend to think that your beliefs are more likely just another example of the failure of our public education system.

  7. Bob,

    I think you have just crossed the line. There are no reasons for insults here and I hope to keep this discussion at a higher level. For the record it is commonly understood that the market has failed horribly with health care (and with that JTB has a point). The free market is a great and good thing, but there are certain things called market failures. I’ll assume that your education has taught you about those. Let me educate you on two areas of market failure. One is the asymmetry of information that I mentioned in the post. If the seller knows less than the buyer than the market is no longer competitive. This is the case in health care. Second, and this is a more complex point that I will elaborate more in a future post is that when people buy health care insurance what they really want is lifetime protection from risk (exorbitant costs and the bad affect of illness), however, what they get is a one year agreement with no such lifetime assurance. So when they do get sick, they may be covered for that year, but when that policy renews it is now more costly, if available at all. This is how insurance is different than fire insurance or most other insurances. Health insurance companies shelter you from risk for the term of the policy, usually a year. They fail in many situations from sheltering you from the more substantial risks of illness. It’s all apples and oranges so lets not compare health insurance to other types of insurance (i.e. fire insurance). I can point you to a good article on it if you want. So JTB is right in saying that “the ostensible reason for insurance (to provide access to health care for the insured) is different from the actual reason the company exists (to make a profit).” Insurance companies are around to make a profit. Consumers are around to get the best deal. In the middle, my goal of providing the best health care for the most people can easily get lost. It’s a broken market and thus far federal regulation aimed at fixing it has just shifted the problems around, or at a minimum left huge holes.

  8. Lucas, let me first step back across the line you claim I cross by apologizing to JTB. I meant no offense and if there was any insult in my comment, it was directed at our educational system. I don’t feel that my own understanding of economics and market dynamics was adequate until I took courses in pursuit of my MBA in marketing and finance; citizens of this country shouldn’t have to secure an advanced degree to learn the basics of our economic system. And I found it ironic that JTB claimed that lack of alignment of insurance company goals was a root cause our problem when public education’s goals ARE aligned and they fail so consistently in pursuit of their mission.

    Lucas, you and I are in agreement in the belief that our current system is broken. It would then be helpful to compare what we see as the most dysfunctional aspects. In an earlier post (first post under “The Typical New Uninsured Person”), I listed the three things at the top of my hit list and proposed what I felt should be done to correct them. Perhaps you could respond to those and/or offer your version of same.

    (In that earlier post, I incorrectly used Universal Health Care (UHC) to mean single-payer UHC. I’m in favor of government-mandated UHC but not a single-payer system because I don’t have faith in a government-run system.)

  9. I will be the first to admit that I lack understanding of basic economics and that is part of the reason I follow this blog with the enthusiasm I do–it explains a lot to me that I have never understood before. And it is why I am currently auditing a course in theology and economics.

    What I don’t consider to be the result of ignorance is my unwillingness to take for granted that the free market system distributes necessities fairly. Perhaps this is just the result of being a theologian instead of an economist, but perhaps too my perspective from outside the system allows me to ask questions that those inside it cannot.

  10. JTB, kudos to you for continuing your education. No one should presume to think they know all there is to know. And I, too, monitor this site to learn more and exchange ideas.

    Your “…unwillingness to take for granted that the free market system distributes necessities fairly” probably will reflect as much on your theological course as on economics. Defining FAIR distribution of wealth (including necessities) is necessarily a values-based discussion. Those who value individual responsibility would say that it’s fair that people receive from society commensurate with what they give to society. Those who value compassion would say that those who have a lot should give to those who have little.

    My beliefs tend fall into the former group and I suspect that you tend toward the latter. When someone who has failed to lift a finger in their own behalf reaches into my wallet to pay for their necessities, I regard that as unfair. When someone is a victim of circumstances and is unable to secure the basics in life despite their best efforts, you would likely argue that those who have the most wealth should be required to help them out. But while I’m in favor of individual responsibility, I can support wealth distribution in such cases…not in the name of fairness but in the name of compassion. I would still maintain that it’s unfair to take wealth from those who have earned it. But I’ll accept some unfairness to help those who have become disadvantaged despite their best efforts to be self-supporting and independent.

    Unfortunately, when we look at the indigent, we can’t readily distinguish between those who are victims and those who are lazy, irresponsible and/or self-indulgent. If we simply supply the necessities to ALL of these people, then the ranks of the indigent begin to swell. Self-supporting people begin to ask, “Why am I marching off to work everyday when the state will take care of my basic necessities, allowing me to simply retire?” Likewise, those who are industrious begin to ask, “Why am I working overtime to earn extra money when the state is taking it away from me to give to an every growing group of poor people?” As a consequence, society’s productivity begins to decline and everyone suffers.

    Karl Marx wrote “From each according to their ability; to each according to their need”. It was the ultimate statement of compassion. Unfortunately, it has proven to be a disastrous basis for an economic system.

  11. Why define responsibility only in reference to the self?

  12. JTB, your question (as I understand it) gets at the heart of a great philosophical debate regarding the basis for personal motivation. While it’s true that many individuals make heroic contributions to society, absent any benefit to themselves, these individuals have been in the minority throughout history and I have no reason to believe that will change anytime soon. Since self-interest seems to be far more prevalent than community interest, it provides a better basis for building an economic system. And, once again, I’ll reference the disappointing results found in communist countries. Those who unselfishly gave of themselves to the state ultimately became disillusioned after being taken advantage of by the majority of self-interested individuals who were more than willing to get a free ride. There are countless examples to demonstrate this. SUV sales continue unabated, global warming notwithstanding. Let other people carpool…I still want to drive myself. Etc. ad nauseum.

    So if the default motivational expectation is that people will act in their own self-interest, a market system seeks to ensure that a free and orderly exchange of goods and services will harness that self-interest so that those who contribute to the greater good will get a reward for it rather than simply being exploited.

    Did I address your question?

  13. Bob,

    If I misinterpreted your comments than I apologize. Regarding your previous post, I will follow up on you post under the “Typically Uninsured Person” and give a few ideas reagrding what I look to see in any reform effort. I’m hesitant to show all my cards, because they have changed over time, and I have not fully explained some underlying principles that direct my thoughts. I want to post about those first. What I will say right now is that I am not as skeptical of a single payer system as you are. We have two examples of single payer systems in America right now that work reasonabally well – VA and Medicare. However, I am the first to admit that it is politcally unfeasible, and this is the game that the Democratic canidates have been playing.

    I will post my ideas in the future, but for now you can check out some of my papers I’ve written. There are links under the “Papers” tab. One of the papers will give you a pretty good idea of what I think.

  14. It seems to me that we are at cross-purposes, no doubt because my interest is primarily theological. I’m finding it hard to respond because my anthropology is so different that my assumptions about what human beings are, need, and do are quite different from the picture painted above. I would certainly agree that there is something we might call “self-interest” at work in human beings, but my sense of what that is and how it is appropriately and inappropriately expressed (and therefore appropriately and inappropriately institutionalized and systematized) would be somewhat different. Since this is such a basic parting of the ways it explains the stalemates all along the way. This might be a really interesting discussion, but it wanders pretty far from the actual topic of this blog, and I think we’ve probably hijacked the discussion for long enough already.

  15. Lucas, thanks for the response. I look forward to seeing your thoughts on what you feel might work. But I don’t think you should be hesitant about expressing your ideas for fear that you’ll be locked into a position. Speaking on behalf of JTB and me, we’re here to both spout off AND to learn. And the proof of our learning is a willingness to change our position based on new information. Notwithstanding your role as the host of the site, I hope your mind is similarly open and you won’t fear being accused of hypocrisy when you incorporate new perspectives. And where appropriate, I’d like to hear more about what you see in the VA and Medicare as representative of successes of a single payer system.

    JTB, I agree that our discussion probably wondered too far afield from the focus of this thread and of this site. I’d be interested in learning more about your views but this isn’t the forum for that to happen.

  16. Wow, that’s some deep stuff. Lucas thanks for explaining this phenomenon. I didn’t even know the right question to ask let alone what the answer would be. But you cleared it up for me.

    I find the dynamic you describe interesting when looking through the lens of a ‘single payer’ system or other mandated system. Your post title is so right on because I am willing to bet it’s those ‘good health’ low need participants that will throw the biggest fit in the face of either a forced insurance situation or national health care.

    I would be really interested in understanding the income, demographic, political affiliation, and religious make of up of the 50% who account for only 3% of health care dollars. Is it an egregious assumption to say that the majority of the people in this group are more concerned about spending money on items like cars, houses, technology, etc…rather than insurance?

    Bob, if the market forces were healthy in health care wouldn’t the market dictate that if 50% of the healthiest in our population didn’t have health insurance that an insurer could come in and reap huge profits off that group of people? I am no business person but it seems to be ripe for the picking.

    Lucas your post makes me think about the dilemma ministers have in choosing to stay in or get out of Social Security. I have chosen to stay in which means that I end up paying upwards of 5k in SS self-employment taxes. I stay in because I think I am morally compelled to because of exactly the dynamic you are talking about here. Great post.

  17. J-wild,

    Let me clear a thing up. When I say 50% of the people spend 3% of the health care dollars I am saying that they account for 3% of the expenses (but not necessarily paying out of pocket). Most of these people do have insurance (16% of the population is uninsured). It’s the insurer who is actually paying and that is why the insurer does everything it can to avoid the most expensive people and attract the healthiest people. Free or discounted gym memberships – its not to create healthy people, it’s to attract healthy people. There are tons of schemes in place to attract healthy people and avoid the sickest. One or two of that most expensive 1% is enough to make an insurance pool very costly to the insurer.

    Now the 50% (inexpensive people) will tend to be young, possibly wealthy people – the healthiest half of America. I’m one of them. I probably account for $500 max of health care a year. That’s pennies.

  18. 3-Wild, a dynamic in the health insurance industry is that most of it (I think I’m right on this, Lucas) is provided by employers. And while employees may be offered a choice of two or three different plans/providers, the contract to offer these plans is signed by the employer. So the employer is the one making the purchase decision and he/she shares the cost with the end user. Employees who expect to have low medical costs will often choose high-deductible plans which offer lower premiums.

    As for an insurance company pursuing those 50% of people with only 3% of the medical expenses, the problem they face is how to identify them. There are various criteria that insurance companies use (e.g., age, prior health problems, sex, etc.) but they’re not precisely correlated with future medical expenses. Inevitably, someone in the 50% of healthiest people falls off a ladder with a chain saw in hand and incurs a $56K hospital bill for three days in intensive care, as I did, six years ago. (I can’t believe I’ve been railing against irresponsible people with risky lifestyles!)

    Deductibles provide a way for insurance companies to offer low premiums while still being sheltered from much of the insureds’ medical expenses. The insured trades total protection for catastrophic protection in order to lower his/her premium.

  19. Bob,

    You are right, but I’ll add one thing (and this is only true in the individual market). Insurers use those high deductible plans as a screening tool. They know that the healthy will choose that plan, and those who know that they will have high health care costs will choose low deductible “richer” plans. People interested in such plans raise a red flag. With employer based insurance this entire adverse selection business is not an issue. The fact that people are grouped based on employment, not health, limits the insurer’s risk.

  20. Actually, Lucas, employer-based insurance will often offer multiple plans that might entail both a high and a low deductible option, providing alternatives for employees. And while insurers recognize that low deductible plans often are populated by applicants who expect to have higher-than-normal medical costs for the coming year (along with those who are simply risk-averse and will pay higher premiums to avoid the surprise of having an unexpected deductible payment), the insurers simply based their fee structure on the loss expectations for such plans (which, over time, become highly predictable).

    Insurance plans are much like any investment vehicle. Higher risks demand a higher return. If a risk pool is highly variable or unpredictable, the insurance company will charge a higher premium to compensate for the greater risk to which they’re exposed. The policy premium then consists of this risk premium, the expected costs that will be incurred by the insureds, the costs of administering the policy and the insurance company’s profit margin.

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