Controversies
In the course of reading, I came across a handful of topics that seem to raise some hackles ...
Moral Hazard
Moral hazard is a principle rather than a controversy, but it is at the heart of most controversies, and merits some consideration.
Fundamentally, moral hazard maintains that an individual bears the risk of their own actions, and if they are not willing to face the risk, they refrain from the action. This is "natural" way of dissuading people from acting in a reckless manner. However, when risk is mitigated, the penalties of acting recklessly are diminished, so people are less reluctant to act recklessly.
It is suggested that providing insurance - at all - makes people less risk-averse than they ought to be, because instead of facing the risk of a large and devastating penalty, they face the certainty of a smaller and surmountable premium.
Decreasing moral hazard can be argued to be a bad thing (it makes people do stupid things) or it can be argued to be a good thing (risk has its reward, which can be individual and public) - so the core concept is ethically neutral.
Insurance v. Public Goods
It was mentioned earlier, but bears repeating, that that the role government assumes in providing relief to citizens who have suffered a loss, is similar to the role of an insurance company in indemnifying its insured, with the exception that the terms are vague (government can step in to provide aid in the face of any crisis or catastrophe) and that it is often done for the benefit of a small number of affected individuals at a cost to many others (through taxation).
An anarchocaptialist would insist that any such instance is abhorrent, and insist that the ethical course would be to do away with government aid and allow people to willingly obtain commercial insurance to indemnify themselves against loss or suffer the consequences for failing to do so.
An anarchocommunist would insist that protecting citizens is the just and proper role of government, and that commercial insurance in all its forms should be done away with altogether - yet concede that individuals would still suffer the consequences of personal actions that are not done in the public interest.
As usual, reality takes a position between these unrealistic perspectives - but understanding the theoretical extremes provides some insight into the positions that are taken in practical matters.
Compulsory Insurance
Compulsory insurance is argued to be a public good, in that innocent parties who are damaged by others may be compensated for their losses - the requirement of insurance is a guarantee that the person who has harmed them has the ability to make restitution. Initially, this is also amenable to insurance companies, who benefit from a market that is forced to do business with them.
However, compulsory insurance tends to cause resentment, and customers are irritated at the price of a product they are forced to buy, and the cry "unfair." That's when things get interesting ...
Government interferes in the underwriting process - demanding coverage be provided at a specific price (regardless of whether this would enable insurers to collect sufficient premiums to pay claims). In response, insurance companies will reduce coverage to meet the premium requirements. The opposite may also be true - government may specify coverages, and insurance companies set their premiums accordingly.
Government may also attempt to practice risk management in public policy. Many of the "nanny government" laws - such as helmet and seatbelt laws, are an attempt to control behavior to reduce risk and thereby keep insurance rates low in that state.
In cases where a government attempts to control both ends - specifying what premiums may be charged and what coverages must be provided, in terms that are objectively unreasonable, insurance companies find themselves in a no-win situation, and generally choose to flee a state rather than operate unprofitably and face inevitable bankruptcu.
It becomes a tangled mess - but the fundamental principles are the government is attempting to compel customers to purchase products they don't want to buy, and compel insurers to sell products at a price they can't support, and all three of them are in a dogfight as a result.
National Insurance Charter
A controversy between state politicians and national ones has arisen over the prospect of repealing the McCarran-Ferguson act and establishing national standards for insurance.
The proponents of this action are largely insurance companies, whose business operations would be more efficient if there were a single set of standards rather than separate ones for the sundry states.
The opponents of this action are local politicians, whose ability to customize their own laws to suit the particular needs of their own constituents is a considerable source of power and voter appeal.
Subsidized Insurance
Subsidized insurance is a compromise between public insurance and government service, in which state or federal governments either pay a portion of the premium paid by citizens to private insurers, or contributes funding to help insurance companies pay claims in times of widespread disaster.
There is quite a bit of argument over whether it is "right" for government to subsidize certain types of insurance. Specifically, government currently subsidizes a number of kinds of insurance on various levels (such as the National Flood Insurance Program) and there is some argument in favor of government subsidy of other forms of insurance (windstorm insurance to help citizens of Florida).
Aside of the topic of moral hazard (q.v.), there is an argument of economic injustice: since insurance is subsidized with tax dollars, this means all taxpayers (even those who choose not to live in areas prone to natural disaster) must pay for the insurance that benefits a few.
Further, class conflict is used to exacerbate discontent: "working-class taxpayers" are funding insurance for wealthy individuals' vacation homes in hazard-prone areas (beaches, rivers, and the like). It remains a sensitive issue that is easily exploited for election-year gains.
Subsidiaries
In some instances, an insurance company may spin off a subsidiary company to isolate a specific kind of risk (for example, a subsidiary company that sells hurricane insurance in Florida), such that in the case of a large-scale disaster, the subsidiary company can be bankrupted without affecting the assets of the parent company.
Naturally, the governments in states where disasters occur with frequency are up in arms about it, feeling that their citizens are being put at risk by companies that will simply fold rather than pay claims. They want companies to put all their assets at risk in order to sell insurance in their state. And in general, insurers pull out of a state if it is not profitable to do business there.
While governors rattle their sabers individually, they have not garnered much support in the national arena. Aside of the McCarran-Ferguson act, there is the realization that individuals in other states will pay higher premiums to enable insurance companies to pay claims in disaster-prone areas, so the demands of politicians in disaster-prone states is contrary to the interests of those who represent other states.
Thus far, the battle has been stalemated, but as public sentiment shifts, so do the laws, and intervention by federal government may eventually occur.
National Health Insurance (Socialized Medicine)
A topic that has been of increasing interest in the national forum lately has been the threat of additional intrusion on the health insurance system on the national level.
Ironically, government's previous attempts to make healthcare insurance more affordable (saving the public from "greedy" doctors who want to pad the bill buy doing "unnecessary" tests and treatments) gave rise to the managed healthcare system (HMO/PPO), which is largely credited for degrading the standard of care (now "greedy" accountants want to save on costs by failing to administer "simple" tests and preventative treatments), all while failing to make insurance affordable for poor citizens (their original objective).
Compound irony: politicians have made scapegoats of the healthcare industry and insurance providers, and the voting public is largely buoying it. In the recent elections, most candidates are touting their own version of a solution - adding more legislation to alleviate the damage done by previous legislation.
The politics run very hot on this topic - probably too much to cover, and not germane to the purpose of the present document, except to remark that a public healthcare or health insurance program may render health insurance moot, or make private insurance critical for those who desire quality care in its wake.
Longevity of Insurance
The longevity of an insurance policy is a matter of some dispute - specifically, when it comes to how long after the fact a claim may be filed.
At base, an insurance policy provides coverage for loss that occurred during the term of the contract. Even if the loss is not discovered until afterward, an insurer is held to the terms that were in effect at the time the event that caused the loss occurred. A problem arises when a loss is "discovered" years, decades, or generations after the fact and someone wants to sue.
For example:, there are instances in which damage as a result of an injury goes undetected for years, or causes a precipitating condition that results in fatality years or decades later. There are also instances where a hazard is discovered years later (for example, the damaging health effects of asbestos or tobacco) and a spate of lawsuits ensue to collect for damages inflicted long ago.
It is largely a legal dispute, but it has become a political one in some instances when politicians attempt to become involved in court decisions to curry favor with voters, and it may ultimately be a matter of law as to how long after an incident a person may sue for damages, hence how long after an incident an insurer may be required to indemnify an insured.
As yet, there is no clear decision - and a decision of law, once made, can be changed.
Domestic Partners
There is some clamor over the status of domestic partners - unmarried couples, especially gay and lesbian couples - when it comes to insurance: whether they can be insured on the same policy, and have the same status, as married hetero couples.
Since the insurance policy is a private contract between insurer and insured, the government remains uninvolved, and each insurance company may set its own policies. However, there are lobbies that wish to make this a matter of public policy, forcing insurance contracts to provide (or deny) the same coverages to domestic partners as they do for married couples.
Until such time as that occurs, insurers remain free to set their own policies, but domestic partners must be especially wary of the terms of their insurance contracts to make sure that their partners are covered - or more aptly, are not unintentionally excluded.
Complexity
A controversy that is beginning to simmer is the increasing complexity of insurance. It has been argued that insurance policies are so convoluted that the insured do not fully understand the fees and coverages included in a policy. A fair amount of attention is also being paid to marketing and advertising creating a general impression of coverage that is not actually included.
Traditionally, courts have sided with insurance companies, placing the burden upon the consumer to understand the particular details of the policy they are purchasing - but some recent events are garnering public sympathy for customers who assume coverage without reading the details.
In particular, there is sympathy for the individuals who have been left in the lurch because the damage they suffered in a hurricane was a consequence of flooding rather than the storm itself. There is also sympathy for elderly individuals and immigrants who are being taken advantage of.
At this point, the controversy has been largely intermittent - but there is an emphasis on the need to be proactive within the industry to preempt the perceived need for regulation from outside.
Discrimination
Also known as "redlining," this is the practice of excluding certain groups from coverage, or charging higher premiums. In general, an insurance company attempts to charge a "fair" premium based on individual risk.
To do so, an actuary will look at various demographic criteria - and in some cases, there is a definite correlation between a factor such as race, gender, age, income, education, etc. and a specific risk. When the public (and especially the media) catch wind of this, politicians pander to the outrage by placing restrictions on insurance companies. It tends to come and go with the seasons.
Presently, there is controversy over the use of credit score in determining insurance premiums (there is statistical correlation, but opponents are painting it as unfair to the poor) - and insurance companies are already backpedalling in anticipation of a legislative solution.
Viaticum Settlements
A "viaticum settlement" is the purchase of a life insurance policy benefit from a person who is elderly or gravely ill. In exchange for being named the beneficiary of the policy, the investor will pay a lump sump to the CQV and take over responsibility for making the premium payments.
To some, this seems rather ghoulish, and there's the sense that companies are ripping these people off - however, anecdotal evidence suggests that the arrangement has been "overwhelmingly positive" for the recipients.
There is also a sense of moral outrage over profiting from the death of an individual, but profit is not guaranteed: the policy buyer is taking the risk that the CQV will live longer than expected and they will lose on the investment (as they did in the 1980's, when treatment of AIDS improved to the chagrin of many investors in such arrangements).
There is also objection on the part of insurance companies, who priced their premiums with the expectation that a certain percentage of individuals would cash out their policies prematurely (which costs the insurer less than paying a death benefit). Hence, if viaticum settlements become popular, it will hurt their bottom lines (because they cannot retroactively adjust premiums on existing policies) and will increase the cost of insurance going forward. However, viaticum settlements have been rare enough to not have a significant impact.
There is also the objection on the part of individuals who believe that viaticum settlements "rob" the beneficiary of the settlement they would have received. This has not gained much traction, as the person "robbing" them is the person whose death would profit them, and who is often the one making premium payments, so they can't object too loudly without seeming like vultures.
And so, the objections have been largely satisfied for the present, but as the boomer generation ages and social security benefits decreases, insurance companies fear the potential impact, and can expect to become increasingly sensitive should the incidence increase.
To date, only one state (North Dakota) has passed legislation to regulate viaticum settlements - however, this legitimizes the practice rather than discouraging it, as the legislation is intended to ensure that the CQV gets a fair price from the investor.
Patents
The use of "business method patents" in the insurance industry has been controversial. It's arguable whether the concept for an insurance product or a method of delivery qualifies as a form of invention, and that a company has grounds to prevent others from offering a similar product. However, for now, such patents are being awarded.
Neither is this controversy unique to the insurance industry: since the precedent was set, many service companies are seeking methods to patent their service models.
Monopolies
Reinsurance companies may set requirements of the insurers they insure as a condition of the reinsurance. Because there are a small number of reinsurers, the conditions they set can often become the basis of industry-wide practices, and because their businesses are similar, they tend to follow a common set of practices.
In the end, this gives the reinsurers monopolistic power in the marketplace. While there is little proof of conspiracy to collude, the appearance of (or potential for) collusion has led some parties to call for preventative legislation or industry regulation - creating a factual governmental monopoly to prevent the possibility that a cartel might form.