Welcome to How to Money. I'm Joel and I am mat and today we're talking about why insurance is so funky with Amy Finkelstein.
That's right, purchasing and insurance policy. Honestly, it's one of those seemingly boring tasks that a companies entering adulthood.
And so whether it was like.
Your parents just making you chip in on the higher costs of car insurance because you were a teenage driver, or maybe seeing the health insurance deduction come out of your paycheck every two weeks that line item, or maybe you're at the point now too where you've realized it's time to get a life insurance policy because you have
folks who are dependent on your income. Either way, it's typically adult task to get insurance, and we just file it away, you know, those documents like we either save them on a folder on our computer, we follow them away without giving them much thought. But our guest, Amy Finkelstein, who is a distinguished Professor of Economics at MIT, she is here today to explain why insurance is actually fascinating.
She writes about this along with her co authors in her new book Risky Business, and she writes just how understanding the insurance market, how it can help us to understand why it's so expensive, what types of policies out there are just terrible, and even what steps we can do to reduce the cost of insurance in our own lives. Amy, thank you so much for joining us today on the podcast.
Thanks so much for having me here.
Glad to have you. Amy. The first question that we ask everyone who comes on the show is what they like to splur John, Matt and I were drinking a delicious triple ipa right now, and so that's something that we spend some would say too much money on, but we're still being smart, saving and investing for the future. What is that thing you like to splor John in your life.
That's a great question. I'd say the thing I spend too much money on. It's not to say I spend very much of it at all, but any amount is too much. Is you know those like candy stores that have like the glass jars full of candies you pay by the pound or whatever. I just love going in there and like scourging on some like M and MS, and it drives my husband nuts. He's like, literally, you could just go to the convenience store and buy a pack of EM and MS, and it would be so much.
There's something about the act of, you know, getting it from those glass jars, scooping them out of the big bin, putting them in my paper bag, and eating them from that bag rather than from the pack, and the convenience.
It's like a sensory experience. Isn't like that?
Is it? Because I feel like that's the old school way of getting candies. Does it harken back to a life that we no longer childhood no longer exists.
Or I'm that old? But thanks for the thought. I don't know that. I think initially it just was like I was in there, and you know, I like it. There's something about the feeling, the sensory experience, and now it's the fact that it is literally a waste of money. They're a very small waste of money, but sometimes it just feels a little bit rebellious and a little bit you know, decadent. Yeah, to do it.
I love it. No, I think that's the coolest thing ever, because, like like your husband says, you could you could go to Costco and buy like a five pound bag of it for absolutely nothing, But for you to go into that candy store. There's yeah, there's a there's an entire experience associated with that. And I say more parad I like that, this is what you do with your rebellius streak. You don't go out there and get tattoos or like, this is how you live that out.
I mean, you know, I'm an economics professor. There's a limits to Bellian looks.
Like right, Amy, Okay, let's let's get into insurance. How is it that insurance differs from broccoli specifically? And then how did broccoli And it's sort of a roundabout way cause you to write this book?
Well, thank you so much for asking that question, because we my co authors Lauren and iv and Ray Fisman and I actually somewhat jokingly, somewhat seriously thought of titling the book why is Insurance different from broccoli? Except that we decided that putting two things no one likes in your title is probably worse than just one.
The publisher was like, no, you guys can't exactly.
But to tell you the origins of that question, it actually goes back to twenty twelve, during the Supreme Court's hearing of oral arguments about whether the mandate in the Affordable Care Act otherwise known as Obamacare, that everyone had to buy health insurance, whether that was constitutional, whether you could mandate that as the Act did, that everyone had to buy health insurance. And at the risk of stating the obvious, I and I presume my co authors, so
I won't implicate them. I know nothing about the law or constitutional law. So we were just interested because we're interested in policy, and particularly policy around insurance. And so it was somewhat startling to hear then Supreme Court Justice Antonin Scalia, during oral arguments, ask the question, well, if the government can mandate that people buy health insurance, can
it also mandate that people buy broccoli or eat their broccoli. Now, obviously he was making a rhetorical point, trying to conjure up the image of a you know, intrusive state. And I would warrant that, you know, he's a very smart man, or he was before he passed away. I'm sure he
knows the difference between insurance and broccoli. But the fact that he could even score rhetorical points on that question made us, as insurance afficionados or insurance geeks, you know, sort of sit up and take note that you know that if a Supreme Court justice could ask that question, we dare say, there are a lot of people in the world that don't understand what we see as the fundamental difference between insurance, and so I'll let you know
what it is. It's actually quite simple, but it's very important. It's that the supermarket doesn't care who buys its broccoli. The costs to the supermarket of purchasing the broccoli and reselling it are the same no matter which customer buys it. But your insurer cares a great deal about who they sell insurance to. And that's because insurance is an example
of what economists call a selection market. Labor markets are another example, credit cards, certain types of education in which the profits of the organization selling the product depend not only on how much they sell, like in any market, including the market for broccoli, but also on who they
sell to. So if you're a auto insurer and you sell to a accident prone, risky, reckless driver, it's going to cost you more in claims you have to pay out than if you sell to a boring safety you know, middle aged woman like myself, who you know, inches along in her car, writes. Actually, as we talk about in the book not to have any spoilers. I'm separately a terrible driver, But that's an example of private information we'll get into and so and so. Why is that a problem.
It's because if if the insurance company doesn't know if you're a good driver or a bad driver, and it sets its price based on sort of a typical accident rate, maybe for someone of your basic demographics, who's going to find that product particularly appealing. Well, the ones who know that, they tend to get into a lot of fender benders or worse, and they're going to have a lot of claims on their uh, make a lot of claims on
their policies. So what that's going to do is increase the costs to the insurance company of providing that insurance, and they're going to have to raise their price. And that is a real problem because then the safe driver, the ones who tend to have very few accidents, are going to be faced with having to pay a ridiculously
high price for their automobile insurance. And the reason that's a problem is because I think the fundamental misconception about insurance is it's about reducing risk, So you want it whether you're safe or like myself a rather terrible driver, because everyone, no matter how careful they are, can be unfortunate enough to get into an auto accident. No matter how healthy they are, they can have a medical expense,
et cetera, et cetera. So the promise, dare I say, the excitement of insurance is it can help each and every one of us achieve some measure of peace and security in an uncertain and dangerous world. And the problem is when there's this selection problem that people know more than the insurance company knows about how likely they are to have claims, it can go in and ruin the market for everyone.
I just want to say, first off, you're getting me pumped up. Get your enthusiasm is contagious. It am getting about insurance.
I'm going to go ahead and apologize for calling insurance boring from early on, Amy.
Thank you very much.
That means a lot.
Right, Well, talk to us about how insurance rates are determined, Amy, because for instance, you say in your book that all State had like three pricing tiers back in the day. It was kind of basic in how you chose the sort of driver's insurance, the auto insurance that you that you had. Now they have like fifteen hundred tiers. Why is it so complicated? Why has it gotten so much more complex over the years.
So that's a great question if you start with the problem being the one I described it. Insurance is something that can benefit everyone, the high risk and the low risk. But that if customers know more about how likely they are to have accidents or claims, and the insurance company knows the high cost, customers are likely to flood the market, driving up prices and making the product worse for everyone.
And sometimes in extreme cases, as we talk about in the book, examples of markets that can be made to completely disappear. Then these can be hard to think of because they don't exist, so you're not confronted with them. But we give examples in the book, like the market for layoff insurance if you lose your job, or the market for divorce insurance, which actually some entrepreneur tried to offer and guess guess what they found that you know
who tended to buy those policies. Anyways, exactly if you didn't already dislike your spouse, hearing that he just bought divorce insurance, might might be might be the extraw that broke the camera but but so, of course, not all
insurance insurance markets do exist. You can buy automobile insurance, life insurance, pet insurance, many examples that we talk about on the book, and part of the way that those markets function or function partially is precisely because insurers try to undo the informational advantage of the customer by collecting
all kinds of information about them. So if you've ever filled out an automobile insurance application, or if you're as crazy as us and you do it just for fun or as part of research and writing this book, you'll find that they ask not only a bunch of I think, pretty natural and straightforward questions such as how long have you had your license, how many accidents have you had with the make and model of your car, et cetera, but they also ask a bunch of questions that might
seem very odd, Like they ask about your credit score, they ask about your marital status, they ask about your GPA. We were kind of excited about that one, since we're professors, and so why are they doing that. It's because it turns out that actuaries who've spent some time playing with large amounts of data on people who buy automobile insurance have found that, you know, it turns out people with
higher grades tend to be safer drivers. Not everyone, but you know, on average, marital status is a predictor of accidents, et cetera.
What about whether or not you have divorce insurance?
Is that that I don't know. But so they ask all these questions to try to equalize the playing field, as it were, level the playing field so that the market can function. And one of the things that we talked about in the book that we at least found pretty surprising is, you know, we start with the history of life insurance in the time of ancient Rome, and perhaps it's not surprising then that when they weren't even pricing based on age, you know, customers were able to
you know, game the market. But even today, in the information age and the you know, in the age of big data, it still turns out that not first time drivers, but you know, once you've been a driver for a couple of years, it turns out you still know more about your risk, your likelihood of having an accident than what the insurance company can figure out even with all these detailed questions, So you still get the problems that selection causes which are either non existent insurance or very
expensive insurance, or insurance with all kinds of clauses and fine print and waiting periods, all designed to try to combat these these selection problems.
And this makes sense that the different companies out there, So we're talking about car insurance, auto insurance, So using that as an example, like there are different companies, different providers out there that want to track your driving for instance, Like that is a piece of data that they want to know. They want to know how often you drive at night, how quickly you accelerate, how quickly you stop with the accelerometers that are built into your phone. And
so that makes sense. And I'm curious what you think our response to that should be. I mean, should it be to say, yeah, all right, let's let's give you all the information possible in order to make this a more efficient market, or do you see that being a problem just from like essentially from a privacy certain standpoint.
It's a great question, and I'm going to give the annoying economist answer. So President Truman apparently famously equipped that he wished he could find a one handed economic advisor because his economist advisors were always saying on the one hand, this, on the other hand, that so and in the book, I think we're very upfront from the beginning that if you're looking for simple solutions and clear, you know, clear
ways forward. That's for the most part, we have a couple of things that we think are very obvious, and every war should be obvious to everyone. But for the most part, our goal is not to say, well, this is the right way to think about it, but to lay out the trade offs. And in the example you gave, you know, the the pro side of letting insurers collect as much information as they want and price on as much information as they can is precisely what you were
alluding to help make the market work better. There are two very important drawbacks that have to be weighed against. That one is the one that you already alluded to, which is notions of privacy. Right, at some point, maybe it's just creepy to have to know that your automobile insurance company is tracking you on your phone, and you know, I know my teenagers think it's creepy that I can track them. You know, how much creepier to know that my insurer is also knowing where I am? Although perhaps
they'd prefer that. But the other issue is something that relates to the question of what it is we're trying to ensure. So if you price on all the predictors of risk, then you get rid of the issue of private information and selection at a point in time, But in doing so, you destroy the market for insurance against being the type of person who's a high risk. So a sort of silly example we give in the book is it's not my fault that I'm a bad driver? Why can't I Why should I have to pay more
for insurance? I was born incompetent. A slightly more there is or a much more serious example, you know, when it gets into issues of whether insurance should be able to price health and life insurance differently for people who have a elevated risk of some genetic disease a breast
cancer gene for example. So on the one hand, if they're not allowed to, that means that people who know they have a family history that puts them at risk for this think they're on average more likely to have medical expenses and are going to buy insurance, driving up the price for everyone. On the other hand, if they're not allowed to price insurance based on this, you're going
to get that selection problem. On the other hand, if they are, then then you know, sort of before we're born, or behind the veil of ignorance, as it were, there's no insurance against being unfortunate enough to be at elevated risk for certain diseases. And we give one example of
how this played out. I think we could all agree quite badly in the sense that in New York and New Jersey in the nineteen nineties, in the small group health insurance markets, so not the employer provided market, but the market for people who don't have employer provided health insurance, both states, at different points decided that it was not fair to charge people different prices for sort of more generous coverage based on their age, or their gender, or
their pre existing health conditions. So they outlawed that. They imposed what's called community rating, which means everyone in the community has to be offered the same price for insurance and also guaranteed issue you can't refuse to serve some customers. And this was done, we believe in the out of
a fairness or equity goal. What ended up happening is the market for this more comprehensive insurance unraveled completely and got destroyed because when you set the price, when you're allowed to price based on anything, the people who are more likely to find that a good deal are the ones who already know they have some pre existing condition, or they're older, are going to have more medical expenses. And so the result was there was a classic death spiral.
Claims kept going up, so the insurer kept raising prices, so the people who stayed in were even sicker, and on and on it went till the market essentially collapsed completely. And so we sort of say, on the one hand, that's fair, everyone faces the same terrible situation of no insurance. But it was a sort of beggar thy neighbor fairer where we made everyone worse off in the interests of fairness, and that, at least to us, seemed a little extreme.
Yeah, it's kind of like the American Airlines All you Can Fly Misshap story the detail or early in the book as well, which is just a fascinating read. And we actually want to talk more about healthcare, health insurance, how messed up that is, and along with some other questions we have for you Amy about insurance. We'll get to those right after this.
We are back and we're talking about insurance with Amy Finkelstein and Amy, I guess we kind of want to get a little more practical as well, and so on an individual level, we kind of talked about insurance from a very high view, why it is that some markets fail, why they collapse completely. But on an individual level, why is insurance so often misunderstood? Specifically in what ways are everyday folks like us, like our listeners out there, how are folks using insurance improperly?
Perhaps that's a really good question. I think the first, or perhaps the most important thing to understand about insurance is that insurance is about protecting against risk, not getting the policy once you know you need it. Once you know you need it, it's too late. You can't the risk has occurred and there's nothing to be done for you.
Kind of like didn't your husband try to get triple A?
I was about to throw them under the bus for so please do please do right? So, the point about durrance is you can't wait till the accident occurs to try to ensure it. And the example, one of the examples we give in the book is my hapless husband. Hapless, and perhaps many respects, but in this particular respect. We were in graduate school and he had an old, beat up car and he had you know, bare bones Triple A towing insurance that I think would only tow you,
you know, to the nearest gas station or something. And his car broke down and he decided that he really wanted to go to his trustee childhood mechanic, who he was sure would treat him well, give him a good deal. And that was, you know, more than the nearest nearest gas station, who was about I think twenty miles away
from from his childhood home. So you know, this was actually in the early days of cell phone, so this was the late nineties, so he's very happy he had a cell phone and he used it to standing there by the side of the road with his broken down car to call Triple A an upgrade to the premium plan, which which you pay more per month for the insurance. But one of the things that comes with is you know, towing of I think up to maybe one hundred miles
or something. So you know, he thought he was very clever.
The person on the other end happily takes his credit card, tells him that, you know, he'll be starting to pay higher premiums, you know, in the next payment cycle, and they'll upgrade that policy right away, sir, and it will go into effect in two weeks, right because waiting periods which are a frustrating aspect of insurance and do undermine some of the insurance value once you buy a policy or not really insured for the first two weeks, but
they're designed precisely to deal with the situation in which people wait until they the risk has occurred to try to buy the policy. So that's one mistake that people make. I think a related mistake is that people can say, gosh, you know, I've been paying my homeowner's insurance for years and I've never had a pay I've never gotten a claim on it.
What a waste cham I wish a tree had gone through my room.
Well, precisely, like you know, that's exactly the point that actually you were getting something out of that insurance all those years. You were getting, you know, the peace of mind of knowing that if a tree did fall on your house, you would be covered. You wouldn't have to pay for that out of your own pocket. And therefore, relatedly, and this is where the economics part, not just the psychology comes in. You don't have to put money aside to save for the eventuality of you know, I might
have a really expensive problem with my home. Instead, you can use that money on, you know, craft beer or overpriced M and M's, or whatever it is you like to splurge on, and knowing that you're just paying that small premium so that if something occurs. And the reason the premium is small is precisely because there's only some chance that it occurs. If you wait to buy it till it has occurred, you can't get a low premium.
Matt's really been wanting to use his life insurance policy, and I keep trying to explain to him, Dude, it's not you probably don't, I don't think, so.
Just keep waiting for that payday. You know what, am I gonna be able to enjoy?
My life's going to be rich when that happens, exactly exactly. There's so many insurance products out there, though, and it's tough to know which ones to prioritize. I think you gave a clear idea understanding of what insurance is for, but how do we prioritize which insurance we bring into our lives? Like there are some requirements right to have certain kinds of insurance, Like if you're driving a car, you're breaking the law in I think forty nine states
if you don't have auto insurance. But like, how do we know then after that, which insurance products make sense for us?
Another great question. So first all up, vote don't break the law. That's a good one. But then I think when you have the choice, you want to think about insurance as insuring large risks, right, because if you go back to the notion of if you don't have insurance, you have to put a lot of money aside just
sitting there in case something happens. You know, if it's a very small cost, if the risk occurs, maybe it's not worth it to buy the insurance given that they're you know, evidently you know, always some administrative costs or insurer profits that are baked in. So we try to ensure things that, you know, like like our home, because if our home had a major problem or you know, burned down or something that would be not something we
could afford to fix ourselves. But we don't ensure our toaster, or our television or our vacations because those are things that yes, it would be very unfortunate and annoying, and I wouldn't be nearly as sanguine as I'm sounding now if our you know, if we missed our vacation. But those are relatively small costs and therefore probably less important to have insurance for it. It's the big things that
you want insurance for. One way you can actually get a good deal on insurance is if you recognize that principle. Then again, go back to homeowners insurance. You want to get a policy that pays for the catastrophic risk. But maybe you're okay with even a pretty big deductible because that, you know, a sort of a certain amount that you have to pay yourself first before the insurance will pay,
because that can dramatically lower the premium. And the reason it can dramatically lower the premium is precisely the selection problem that our book is about. That if you know your home is, you know, falling apart at the seam, so to speak, you're going to want a very comprehensive policy. You're not going to want, you know, the first five or ten thousand dollars that you have to pay out
of pocket. And so if you're if you're willing to forego that first five or ten thousand dollars, you can get a much much lower premium to cover the rest of the of the cost should something really catastrophic happens. It does mean that, you know, if you have a minor boiler leak, you may be out of pocket yourself.
Right basically, like you're talking, you know, the way to think about what insurance products to choose is to ensure there's larger items. And I think even said this word, but if there is an expense in our life that might be relatively large. And the problem there for a lot of different folks is that we all have different incomes, we all have different networths, different amounts of money in
the bank. Do you have any sort of rule of thumb or is there maybe just a healthy way to think about how individuals should be making that calculation themselves. Because for one person, the idea of ensuring like a trip or vacation trip insurance, that would be annoying, but
I can handle that. But for somebody else, for instance, who may not have any money in the bank, and this was you know, they scraped together pennies and dollars over the course of years in order to make it to this destination for their honeymoon, that kind of thing. It would be a really big deal. And so I would like to get your thoughts on maybe how to approach that dilemma.
Yeah, that's interesting. So your example already made me think of something that I wouldn't necessarily have thought of without it, which is, you know, ensuring against unpleasant things happening is a little different from insuring against expenses that you have to pay so to take the trip. Example, when I said we don't think we should ensure our trips, it's not because, oh, if our trip is canceled, we'll just
you know, go out and immediately schedule another trip. There is a real loss, but it's a calculated risk that, you know, given how much, given the probability of the trip being canceled, and given the high prices of trip insurance, in part because people who buy it are ones who think they trip they know that the trip is likely
to be canceled. We are personal I mean, there's a right or wrong answer here, but our personal preference is that we would rather risk for going the trip than you know, adding to the cost of every trip substantially by buying this insurance. On the other hand, most of the things that we tend to ensure are things that you they're not a choice, They're not just obummer I didn't get to go on my trip. Most people don't have the luxury if their car breaks down of saying well,
I just won't fix my car. They need it to get to work for example. Same with you know, a medical expense. So there, I think the way to think about it is if this is something that you really are going to have to pay for and it's not going to be possible or relatively easy to scrape together that amount of money, then that's something to really you know, to look at the pricing of course and think about, you know, what your risks are, but that's something to
really consider insurance on. So again the toaster example. First of all, dare I say many of us can live without a toaster, but also, like you know, you can buy a pretty darn cheap toaster. So most of us are fortunate enough that it's annoying if our toaster breaks, but either we can decide to live without a toaster or to replace it on these.
Our neighbor's toaster exactly. Well, talk about self insurance then, because to me, that's a huge part of the equation and part of what helps us drive costs down as well when it comes to the insurance market, is us having saved up more money, it allows us to, for instance, increase ourd deductible. I found that out the hard way recently, as literally a tree fell through my roof amy and we're talking about a fifty thousand dollars plus repair. I
have the super high percentage deductible. It's I'm in for eighteen thousand dollars of this. But it saved me a bunch of money over the years, and hopefully, hopefully I will have an incident for many years to come and it'll continue saving money even though I have this big outlay. But how does us having more skin in the game impact what we pay for insurance?
I mean, I think the more skin you're willing to have in the game, the lower or more skin you're able to have in the game, I should say, the lower a price you can get for your insurance. And let's take your homeowner's policy. So we had our own I'm sorry to hear about the tree in your house. We had our own experience, which we talk about in
the book. You know, I tried. I looked far and wide for the highest homeowner's deductible we could find, which at the time was tend Shortly after we bought our home and our homeowners insurance policy, there was I don't know where you're located, but if any of your listeners are from the Northeast or from Boston in particular, the winter of twenty fifteen was record levels of snow. Everyone's
house was leaking. The word ice dams was on everyone's lips, and we had, you know, major leaks and completely blew through our deductible. The next year, our boiler broke and once again we blew through our deductible. And it caused my long suffering husband to comment that it sure was expensive being married to a so called insurance expert. But and here's the silver lining for you as well. You know, he's nothing if not, you know, fair, and he actually
went and calculated it. And despite those two major events in which we had to pay the full deductible. You know, we moved into our house in two thousand and nine, so we've been there a long time and there's no question that even counting those deductibles that we had to pay the substantially lower annual premiums from being willing to bear that amount of the risk. We've still come out ahead, and I suspect you would find that you had as well. So hopefully that gives you some consolation.
I think it will too. Feels like a gut punch in the moment, but yeah, I have confidence in in the numbers that I've run and in the reality that hopefully you're not following a claim every year or even every.
Five years petically. That's where the I mean, that's where you run the math. Yeah, you run the numbers, you do the math, and you trust the data as opposed to like a knee jerk reaction where you might make a change. And so I think it's wise that your husband also did that.
Amy. So yeah, let's talk about healthcare.
Health insurance here, because the best of all insurance, yeah right, obviously, so easy to navigate, so cost effective, well and specifically, like you touch on this just barely in your book, but I mean, it costs a slive of middle class Americans just like a small fortune every single year. And so with that being the case, there are some folks like Joel and I we've turned to an insurance like product, and I say insurance like because it's not insurance, it's
health sharing. So because they can't technically be called insurance, one of the reasons for that is because they're not regulated in the same way. But some of these have been around for decades. What's your take on this model of healthcare sharing as opposed to actual insurance.
So let me start by noting one of the things that I think is unusual, perhaps unique about health insurance compared to any other type of insurance, which goes back to something you were asking about about, you know, how can you decide what makes sense for you? People have all kinds of different incomes. Well, all of the risks we've been talking about so far, your home, your car, your trip, all of those are risks in which the
amount at stake tends to increase with your income. So people who have more income have you know, tend to buy more expensive cars or more expensive homes, or go on more expensive trips, or if they want life insurance, need to ensure you know, a larger salary to you know, to cover their dependence in the event of their demise, so that there's a natural, built in process by which you know, the insurance becomes more expensive as your income goes up, because the item that you're trying to ensure
is becoming more costly as your income goes up. But health is the exception to that, right, So you know, no matter your income, medical expenses, you know, the cost of treating a severe illness or roughly the same. In fact, there's also a lot of evidence that people of higher income are in better health. So if anything, it goes the wrong way that it's lower income people who have higher expected health expenditures. They certainly don't have lower ones.
And so that is one of the reasons why you know, as an economist, I don't understand what it means to say I can't afford life insurance rest a short. As a human being, I understand what people mean. But you know, conceptually, you know you're you're getting some income and there's some risk you're going to lose that income, so you spend some small proportion of that income to ensure that risk.
But you can literally not be able to afford your health care or your health insurance if you know the expected risk you're trying to ensure or just is just so large relative to your income you know, think about if you end up with you know, catastrophic cancer and late stage cancer and catastrophic oncology expenses, that can be
hundreds of thousands of dollars. Right. So in that sense, I think one of the things we spend some time talking about the book is this is this is an example of combined with the selection problem, reason you may get government intervention in these markets. Now, the particular health sharing policies you asked about, those are designed, as you said, to avoid the heavy regulation that you know comes up in many insurance markets, which can feel a La antonin Scalia,
annoying and intrusive. Often those regulations that are motivated precisely for trying to make to deal with the selection problem. That doesn't mean they always deal with it well, but that's part of the point. So I guess the question about your health sharing policy is if you've been able to create a pool of people who are all plausibly in the same boat health wise and pool your risk, that's terrific, assuming as I'm guessing you guys are relatively
young and relatively healthy. If what you've done is by a policy that isn't going to pay much in the event that you get sick because it has very low maximum payouts or something. Then I'm sorry to say, you know, you haven't really solved the problem because you haven't really bought insurance. So I would have to know more about your particular policy to be able to comment on.
That makes me think about kind of what Well you talk about pet insurance and there's one pet insurance product for an older dog that you say, it's like, I think it covers up to fifteen thousand dollars out of pocket, but the premiums are like eighty five hundred dollars a year, So really that it's not much insurance covers.
Oh yeah, no, it's worse than that. The fine print on that is like it cover, Yeah, the premiums are something like seventy five hundred dollars a year, but you have to pay twenty percent of expenses out of pocket and their exclusions for this, that and the other thing.
And so basically becomes worthless.
Yes, So that's an example of where you probably shouldn't buy the policy because and why is it so expensive? Again, some of the reason is this selection or private information.
And here we give another example in the book about exactly what form that you know, selection takes the example of my co author lron In av who has a dog and did not buy pet insurance in part because he looked at the prices you know, that's what we do, and saw that, you know, this was ridiculous, but also because relatedly he knew that, you know, he loved his dog, but if something happened to Shoko, he would want, you know, to put him out of his misery and and move
on from there. What he didn't know until Shoko got sick is that his wife felt very differently. His wife felt, you know, no expense should be spared, no effort left undone to try to save Shoko. And he said, he talked to her, he said, come on, so what's your what's the maximum you're willing to spend and she said there is no maximum, and you know, into an economist, that's just like nuts. But anyway, unfortunately Shoko did get better.
Okay, then yes, so then we'ren.
Tried to buy pet insurance for Showco and he couldn't because now Shoko has a pre existing condition. It's kind of like my husband with his you know, broken down car by the side of the road. Now that you know your dog tends to get sick. It's hard to quote unquote ensure that. But more to the point, should they ever get another pet, he will certainly buy insurance because he now knows what's his prime information. It's not that this pet that he hasn't yet bought, he knows is,
you know, sickly. It's that he's learned, perhaps the hard way, that he's married to someone who is willing to, you know, spend anything when a pet gets sick. And that's the kind of private information that's going to be very hard for an insurer, no matter how sophisticated their actuarial algorithms and data collection are, to be able to figure out about someone.
Well, what's crazy, too, is as individuals, I think sometimes we don't even have the right information. As individuals. Sometimes we might even be blind to what we would be willing to do in that situation.
Because how much we'd be willing to spend.
Yeah, yeah, because I mean there might be individuals who think that, oh, well, I know what we're going to do in this instance. But I think you might even be surprised. When you are put in these kind of situations, it changes you to a certainty.
So I plead completely guilty to that. Okay, I confess to having spent one hundred and fifty dollars on heroic measures for what turned out to be a dead hamster. You know, I have a nine year old daughter in tiers, you know, and apparently it took one hundred and fifty dollars for them to ascertain that the hamster was indeed dead. But you know, what are you going to do? Right? And in retrospect, it was idiotic. It was a total waste of money. I think she would now even recognize that.
But in the heat of the moment, we're not sure what's going on with Jimmy, and she's sobbing, and you know, it really was quite I mean, even the people at the pet eer where tears were trickling down their face because you know, poor Jimmy and poor daughter, you know.
Nine year old book.
But yeah, so you don't ever really know what you're going to do till you're faced with it.
But generally speaking, I mean, we can look at the data and there are some policies. Let me, so you've pointed out that pet insurance, generally speaking, is not a good policy for most folks to purchase. But when we come back from the break, I would love to hear we're going to give you the break to think about it. But some of the other policies, some of the other insurance products out there that you might tell folks to think twice about, that might that we might even steer
folks away from. We'll get to that, as well as some other questions right after this.
All right, we're back from the break, still talking with Amy Finkelstein about insurance. It's a funky thing, and different insurance products are funkier than other. Some are more straightforward, which makes me think Amy that sometimes the more complexity that's thrown into an insurance product, the harder it is for the consumer to understand, and oftentimes the more expensive it gets. So Matt before the break said, what insurance
products would you may be curious steer clear of. Something that we talk about is like term life insurance, great option, and yet some of the other funkier versions of life insurance can cost ten to fifteen times as much and they're not necessarily offering you enough in return. So I don't know what are your thoughts on those other kinds of life insurance and just maybe other insurance products in general that you would steer people clear of.
Yeah, so just to be clear, you know, before the break we were talking about how pet insurance can be, you know, very expensive relative to what you can potentially get for it. I would stop short of saying therefore you shouldn't buy it. I would more just say you should think carefully before you buy it about you know, how much could it pay out, what's the chance of that event occurring, which in part depends on what you know about your patent and also what you know about yourself.
I think the kinds of insurance in general that should raise red flags even before you get to doing those calculations are the policies that seem to have caps or limits on how much they'll pay out. Because remember, the point of insurance, really, the real value is protecting against the big risks, not the small risks. So's it's backwards to have, you know, insurance that covers small things but
not big things. And I think a classic example of the type of insurance that is called insurance but isn't really and that you want to be careful of is dental insurance. So I don't know if you guys have ever I hope you haven't ever had major dental issues, but if you have, excellent but if or when you do, you will discover that your so called dental insurance, I would wager, is nothing more than a bit of a
pre payment plan for your routine cleanings. You know, my plan pays for you know, cleanings every six months and sort of minor stuff like cavities. But if you ever need a root canal, an expensive implant, some major dental work, you will quickly hit the cap on your insurance coverage. And our co author Ray Fisman in the book talks about his own experiences with this, which also reveal why this dental insurance is so crummy and so not what
an insurance product is supposed to be. And that's because dental care, for the most part, is timable. So if you need a root canal or an implant, you don't need it. It's not like you know, when you're hit by a car, you don't need the care immediately. You need it sometime soon. And so go back to one of the ways that insurers try to prevent these selection
problems through so called waiting periods. Well, you know, with most health insurance and dental insurance, there's an open enrollment in period in the fall where you can change your plan's that's like a one year waiting period, but you can wait. Dental care is timeable. And so what he did when he discovered he needed expensive implants is wait till you know the open enrollment to try and you know,
increases dental insurance. And guess what he found. Dental insurance doesn't cover implants precisely because many people will do that. And there's actually, you know, rigorous research on this that we talk about in the book that an economist named Marika Cabral has done showing what happens when you, you know, make dental insurance more generous, you know, raise the caps on what will be covered, you get exactly the kind of selection problem those caps are designed to avoid.
Okay, So is that the purpose essentially behind open enrollment periods, that is to essentially regulate or is it for insurers to try to regulate this selection problem?
Yes, So we talked early in our conversation about the most natural response to dealing with this selection problem is to collect more information on the customer. The other thing insurance companies do, and this can explain a lot of otherwise puzzling or even maddening features of insurance products is they try to design products to attract the types of customers they want, and not attract the types of customers they don't, and waiting periods are a classic example of this. Right,
a waiting period is a way to make sure. You know, my husband doesn't wait till his car breaks down to buy deluxe towing insurance. Rey Fisman doesn't wait till he needs implants to buy better dental insurance. Annual enrollment periods are a form of a waiting period. They're saying you can't change your policy within the year unless you have a so called qualifying event, something that doesn't look like I got sick, that's why I want to increase my insurance.
But I had child, or I got married, or I changed jobs. So we talk in the book about various ways that insurance companies can design products to try to
make them less appealing to the high cost customers. One of my favorite examples in the book is an example of the opposite of insurers trying to design the insurance to appeal to the customers they do want, and the example is from two health researchers, Cooper and Trevetti who tackle the question of I don't know if you've ever noticed this, but some health insurance plans will say that with our health insurance plan comes a discounted premium on your gym membership. So why do they do that?
I think is it because it makes you healthy?
Surveys right, that's there.
You go, that's the natural response that you know, insurre I mean and customer incentives are aligned. They both wanted, you know, the customer to stay healthy separately. There's some excellent randomized trial work showing that. To break it to you know, firms when they offer workplace wellness plans, it's not to make it's not because it makes their employees healthier.
But what workplace wellness plans do for employers and what discounted gym memberships do for health insurance sellers, is that they tend to attract the type of customers for whom this would be appealing, and those tend to be healthier,
lower cost customers or healthier lower cost employees. So you know, with the example of health insurance products that bundle with it a discount on a gym membership, it's not because going to the gym is going to make you healthier in a way that will show up noticeably in your medical expenses. It's because you know, it's only the relatively healthy, relatively you know, not sick customers who can at least delude themselves into thinking that they're going to use that
gym membership and go to the gym a lot. If you're already suffering from a number of build dellitating issues and illnesses, that gym membership isn't that appealing because.
You know you're not attractive at whereas you.
Know, the healthy among us such as my fortunately myself, can at least delude ourselves into thinking, oh, yeah, I bet I'd go to that gym. Even often we may not end up doing so well.
And I think a couple of your examples that you just just gave with the dental insurance and with the pen insurance, it's a good reminder to look at the details, the specifics. What does this insurance policy pay out on? What am I required? Not just deductible wise, but like what are the limits, all that the caps, all those kind of things are really important to think about it
ahead of time. Last question for you, Amy, if you were in charge, if you were like made the insurance czar of America something like that, you could make any changes or rules you wanted. You are all powerful. How would you make insurance more effective for people across the country.
Okay, that is a super hard question, and I'm going to give you a fairly unsatisfying cliffhanger of an answer, which is to say that, you know, our book is about insurance markets large, pet, auto, dental, life, health, et cetera. But my own and my co author, Lauren in Know's particular area of research and specialty is health insurance. So we get asked that question all the time about if you were, you know, czar of the world, what would
you do to fix US health insurance? And for a long time, our answer was that's a really hard question. We don't know the answer, That's why I study this. But at some point it became embarrassing that we didn't at least have something to say about it, and so we actually spent the last year and a half writing a separate book that is coming out this summer called We've Got You Covered, Rebooting American Healthcare. That is the answer to what we would do to fix US health.
Insurance question is one of those solutions untangling healthcare from employment.
I'd go with yes, there is no. There is no. The fact that health insurance in the US is so
tied to employment is a perverse accident of history. It had to do with wage and price controls that came in during World War Two, and one way around that during because basically there were labor shortages and to control prices, they put in wage wage ceilings, and one way to attract employees without being able to offer them higher wages was to offer them benefits like health warre benefits, and that at some point got codified into a tax subsidy
to employer provided health insurance, which is fairly i'd say uniformly reviled among by economists across the political spectrum. It's one of the few things you can get economists to agree on. There. There's only one hand. We're not two handed on that.
We really do appreciate you talking to us about insurance like truly risky business. It is the most fun that you can have actually reading about insurance because you I'll give some great stories just throughout history of different markets and how they failed and how that goes into the pricing of insurance. Lew that it asks, Yeah, but where can folks find that book? Where can folks learn more about what you are up to these days?
They can find it online at Amazon or any online book, Burns and Nobles. It's called risky Business, Why insurance markets fail and what to do about it? And certainly our goal was to make it fun while but hopefully also you learn something. I mean, those are my favorite books to read where you're reading something that kind of reads like fiction but it's actually nonfiction. I don't know if we achieved that, but that was certainly our.
Goal, almost like the Malcolm Gladwell model, right, he's so good at that. Absolutely rightly, Well, I think he achieved it. Amy, Thank you again so much for joining us today. We really appreciate it.
Thank you so much for having me well.
Amy, thanks again for speaking with us. All right, Joel so spoken like a true economist.
Amy.
She was saying, like, on one hand, this, on the other hand, not a nuance, Right, Well, there is, And I guess I'll go ahead and give my my big takeaway from this episode. We are trying to get her to kind of out maybe some specific insurance products and
whether or not that we should completely avoid those. But what it came down to, what Amy pointed us to is essentially what we need to do is look at the fine print and to determine for ourselves whether or not any insurance product that's out there if it makes
sense given our financial situation. Given that's that select that problem of selection, right, Like, we have the information that we know is going to lead to us either using insurance or not using insurance, and so we have to make the best informed decisions based on what it is that we know. But a part of that is, like she said, looking at some of those maximums that insurance companies are willing to pay on whatever issue it is
it is that come that comes up. And so just like and you kind of hinted at this as well, but making sure to read the fine print, make sure you know what those maximums are, making sure that you know what you're out of pocket maximums are.
Going to be.
But what are you actually getting, what are you actually you're actually getting, and how much you're gonna have to pay not just in premiums every year, but also when that event does occur, because in that way, it is a math problem.
Just like she said, with her homeowners insurance. Her husband did the math and turns out they still came out ahead even though they two years in a row they hit their very expensive deductible. So that's my big takeaway.
Yeah, how about you, though, well you got Yeah, you've got to be careful. I think when she said protecting against the big risks, that's kind of what you need to focus on. You can't de risk everything. And there is kind of like an insurance product available for almost
everything under the sun. It feels like, whether you're buying that laptop, you're getting extended warranty, whether you are buying a flight, and American Airlines or Delta United says, hey, guess what for ten percent of the cost of this of this ticket, you too can insure. Again, it's not making it on your flight. And there are all sorts
of insurance products that we can buy these days. But if it's something you can stomach, then I think it's something you should self insure on and that is going to save you money in the long run. And so some insurance products are better than others, and the big things are Yeah, if you die prematurely, I think your home, your car is even one of those things. But but your car, depending on how old it is and what
sort of condition it's in. It's something you can self insuran more than maybe you currently are exactly I'm raising you're deductible and having more money in the bank. Yeah, and having reduced amounts of coverage which required their buyer's state.
But uh yeah, nice man. All right, Let's get to the beer that you and I enjoyed during this episode. This was a kon Tiki and not surprisingly, this was a tropical triple ipa by Los Angeles ale Works. What were your thoughts on this one?
Okay, So part of the reason I picked this beer up when I was in Los Angeles and I brought it back here for us to consume is because the Kantiki it was actually a ship made by a Norwegian and he crossed the entire ocean on this this tiki, this tiki ship essentially back in nineteen forty seven. His name, by the way, oh really thor haired All what like,
what a super awesome Norwegian name. So, since I am more of Norwegian heritage and I actually went to the kon Tiki Museum when I was in Norway back in the day, I figured we had to give a beer a shot. Oh that's crazy.
So, like you see kon tiki, and especially the way it's written on the label, it makes you think of like a tiki hut, I know. And so I guess I don't get this tiki just mean like it's made something made from like bamboo.
I think. So that's my guess, okay, but.
Which we normally associate with tropical climates like in Hawaii. Yeah, but I guess bamboo grows in Norway as well. I don't know. I think.
So he went all the way across the ocean, all the way up to South America and on his homemade raft, and then I don't know if he made another one while he was down there. I forget. But this guy, they've got like koonyaks named after him and stuff now because he's like a folk legend and or nice. But this beer I thought was was great. It was really fruit. He had big mango vibes going on, and it was kind of sweet because it was a triple ipa as well.
So yeah, mango. It definitely picked up on that, like passion fruits like different some of the different stone fruits out there, but it certainly had some of those tropical fruit flavors going on, and it may me feel like I was more hanging out in Hawaii than Norway myself, but talking to insurance while stipping from a coconut or something exactly. But yeah, so this again was Kantiki Triple I p A from la Al Works. But that's gonna
be it for this episode. Listeners can find links up in our show notes up on the website at how tomoney dot com, including not only a link to Risky Business Amy's current book, but we'll we'll have a link up there as well for the one that is set to come out later this summer. Yeah, you can find that at how to money dot com. But Joel, that's gonna be a buddy until next time. Best Friends Out, Best Friends Out.