"State" Insurance Makes a Comeback

The Dangers of Being a Commercial Not-For-Profit

Private property is theft--or so said French anarchist, Pierre-Joseph Proudhon way back in 1840. The implication is that public property is much more righteous.

The antipathy to private property lives on today. Actually, that's an understatement. It does not live on--it has triumphed. Most Unbelievers, and more than a few Believers, think that in a choice between the government owning, say, a power station and a private company, state ownership is superior and will produce superior results.

One animus of the prejudice against private ownership is that a private business exists to make a profit--therefore, it needs to charge more than actually required to produce its goods or services, which in turn means that its customers are being "ripped off" or stolen from. Privately owned businesses, therefore, exploit their customers. Ergo, private businesses are intrinsically evil, being institutions of exploitation and theft.

Now this is all nonsense, of course, but the truth or validity of an argument has never been allowed to get in the way of a "good story".

One device put forward to counter the purported implicit thievery of all private business has been the co-operative. Often times co-operatives eschew profit making and simply circulate cash back into the business. Customers are supposed to get a better deal from this. Prices are supposed to be lower. Another version of the co-operative idea is a mutual company--most often found in the insurance industry. Here the "noble idea" is that the policy holders "own" the company, which means that all trading surpluses are supposed to be put back into the company, thereby lowering premium costs for consumers. Win-win, non?

"We don't take a profit, so our trading surpluses drop straight to the policy holder's bottom line". AMI, the Christchurch based mutual insurance company which has just gone (virtually) bankrupt, used this argument--as all mutual's do. But it turns out (at least according to its critics) that it has been undercharging its policy holders for years (to fulfil the promises of a mutual having lower premium charges), while taking enormous risks in an aggressive expansion drive. According to the NZ Herald:

Bitterness has emerged against cash-strapped AMI Insurance for undercutting rivals' policy premiums then being forced into a $500 million Government bailout.

Competitors lashed out at what they said was a cheapskate business which grew too fast, took ridiculous risks, undercharged, failed to accumulate enough capital and was then hammered by the disaster. "They price everyone else out of the market with their stupid rates and then go running to the Government for a handout. Now it's just another socialist free ride for the people of Christchurch after AMI has been run like a cheap shop," said one angry insider.

There at least two great weaknesses in mutual companies. Firstly, over time they tend to disguise the true costs of doing business. Not under compulsion or obligation to make a profit, all surpluses (theoretically) get ploughed back into the company's operations, so that the company becomes bloated and wasteful of capital.

A profit making company intrinsically has a far higher discipline riding it. In the end, the owners of the business will only approve re-investing profits into the business, rather than distributing them to the owners, if the business will produce a greater return on those re-invested profits than the owners could earn in their own endeavours. This means that everyone is far more focused upon what the true costs of doing business are, and what the actual returns any new investment will generate. If the returns are likely insufficient, profits are unlikely to be reinvested. In a mutual, profits are reinvested willy nilly, without rigorous discipline.

The second core weakness in the mutual ownership structure is that when additional capital is needed--as is the case with AMI now--it has no-one to turn to. No investors, no shareholders, no real "soul-to-damn, butt-to-kick" owners. Moreover, no new investors, since any new investors will not be allowed to own the company.

So AMI has had to go begging to the Government. And the Government has "had" to bail them out since that is our system of mixed market socialism in New Zealand. If the problem is big enough the Government will end up owning it.

Now there is a straightforward solution to the inherent flaws in mutual insurance companies. The regulators ought to require a significantly higher level of capital reserves for all mutual companies on the ground that such companies cannot access capital markets for fresh capital in the event of a significant calamity. Such change would be a good outcome from a bad mess.

In the meantime, we also hope that the government will take full ownership rapidly, sell off the saleable parts of the business, and wind the rest down.

Profit is not theft. It is not a dirty word. It is the canary in the coal mine that alerts everyone to weakness and commercial dangers.

MacDoctor Counterpunch

Cockroaches Scuttling for Cover

We read MacDoctor's blog regularly. Today he counter-punches the ACC for its deceptive and misleading commentary to a parliamentary select committee. ACC, of course, is the government's monopoly insurance provider for victims of accidents. We remind everyone, particularly overseas readers, that New Zealand's Accident Compensation Corporation it a statutory insurance monopoly that exacts taxes from every New Zealander, primarily through the employer, to fund a no-fault accident compensation scheme. Since it has no competition to keep it honest, ACC is an incompetent, bureaucratic morass.

Now, to be fair, some of this decrepitude is not of ACC's making. The previous left-wing Labour government sought to transform the ACC into a social welfare arm of the state, greatly expanding the range of "coverage" or conditions under which someone could claim ACC payment for medical treatment. This was in response to rising public health care costs. To try to cut costs in vote Health, the "robbing Peter to pay Paul" Labour government decided to shift some liabilities to ACC, which has a capital investment fund, built up over years, to fund long-tail insurance claims. Never trust a socialist when other people's money is lying around.  (We do hope our readers in the US are paying attention to this. This is where a public, taxpayer funded health system inevitably leads. Oh, sorry. We recall that the US federal government has already raided and expropriated--err, "borrowed"--Medicare and Medicaid funds for ongoing operational government expenditures. Too late.)

In any event, like all socialist schemes, eventually other people's money runs out. Suddenly, under the economic downturn and recession (in New Zealand we have had a double dipper) the (new, less socialist) government has run out of money and had to start borrowing. Suddenly cutting costs became flavour of the month in government circles--including at the ACC.

As part of the drive to cut costs, ACC started refusing legitimate (lawful) claims. It discovered a new reason for refusal: "degeneration", otherwise known as aging. If not aging, it is a condition where, as a result of an injury, secondary complications emerge. Imagine an accident that smashes a hip. The accident results in a pronounced limp which does further (maybe spinal) damage to the patient. ACC has started to argue that the further damage is a result of degeneration, and not from the original accident. Result: no funding. Bad luck buddy. Enjoy your life of pain. Now, remember that this is health insurance which the patient has involuntarily paid for through the taxation system. Suddenly the state insurance company is acting like a nasty private insurance company. But in this case it is made worse because there is no competition allowed for ACC  to help keep it honest.

Well the ACC hierarchy were before its supervising parliamentary committee yesterday and were asked to explain why their rates of refusal due to "degeneration" had risen. Their lame explanation: medical specialists had increased their rates of referral to ACC for funding. Those nasty doctors were making claims they knew would never be approved. Thus speaketh the bureaucrat--who congenitally does not know the meaning of "the buck stops here". Like cockroaches scuttling for cover, they were.

MacDoctor slams this egregious canard for all that its worth, which, to be sure, is substantially less than a brass razoo.

Douglas Wilson's Letter From America

Yet Another Den of Thieves

Culture and Politics - Obama Nation Building
Written by Douglas Wilson
Tuesday, January 18, 2011

In the debate about the repeal of Obamacare, there are people who understand the principles involved, and there are the wafters. The wafters can blow either way, depending upon the prevailing breezes in their district, but wafters they are -- whether they blow to the right or to the left. If they blow in the right direction it may benefit both me and the republic at large, but such men are not to be counted on. Winds change direction sometimes.

We can see this in the response of some Republicans to what is perceived to be one popular feature of Obamacare, the fact that "preexisting conditions" are covered. These guys want to repeal the monstrosity at large, but they want to keep (because popular) this small monstrosity. That resonates well with certain audiences. They can put it into their speeches in the home district without wincing. This is because most people in most audiences don't know what is actually being said by it.

There are two ways to spread risk over a large population. The first way is Christian -- it is biblical because the risk is shared voluntarily, and without coercion. The second way is from the pit -- because it depends for its success on violence and coercion. These are the two ways -- the way of peace and the way of blood. The way of the cross or the way of the gun.

If enough people pool their resources at a rate of ten dollars a month, they can then together take care of some disastrous occurrence that has befallen any one of them. In order for this to work, the disastrous occurrence needs to have not already happened. If it is okay for it to "have already happened," then a bunch of people to whom it has already happened will show up tomorrow morning, applications filled out, and all of a sudden the math doesn't work any more. And after the math quits working, and ten bucks a month ain't cuttin' it, then the temptation for the other way of doing business kicks in.

This other way still talks about "contributions," a linguistic vestige of another time and era, but it is the kind of contribution which, if you fail to make, lands you in chokey. This is called strong-arming, extortion, thuggery, intimidation, or, as some brethren on the left would have it, compassion.

The logic of free market insurance is compassionate because it involves free men and women taking care of themselves by means of free transactions. But what about the people with preexisting conditions, who are in a terrible spot? The law of Christ requires compassion here too, of a different nature, but which is still voluntary. This is why Christians should overflow with charitable (and voluntary) giving to take care of such folks. We should take care of them (though they cannot pay) because Christ took care of us when we could not pay. Give. Sacrifice. Bleed. Freely we have received, freely we must give. But this text does not say, please note, that because we have freely received we must haul out the guns, and the jackets with big block letters on the back, to make sure other people are giving, sacrificing, and bleeding enough.

Coercion skews everything. Even something as admirable in principle as Medishare, where Christians try to help take care of one another, is corrupted by the presence of governmental coercion. As a pastor, I know of at least three instances of Christians who belonged to this kind of program who were turned down in their applications, being in effect told that "we will cover this if Medicare turns you down. But you have to apply there first." In other words, they were told to go soak some unbelieving chump in Kentucky who is struggling with his taxes. If he does not cough up, then we will help out. Ah, a Christian testimony is a glorious thing. Behold how they love one another, after they have put the squeeze on others.

Wanting to have your insurance cover your preexisting condition (at no extra cost to you) is exactly like trying to place a bet at the Kentucky Derby after the race is over. You want to bet somebody that Miles Ahead will come in miles ahead when he already did. More than that, you want good odds in your favor. You can't get any takers for some reason, and so you call the men with guns to come and make somebody bet with you. The reason this has happened is that the human heart, which ought to be a house of prayer, has become a den of thieves.

ACC Abuses

Housecleaning Required

We all understand the basic principle of insurance.  Large numbers of people pay small amounts of money into a big pot.  When damage occurs to some, the pot of money is accessed to compensate them or restore them.  It is an excellent service.  But the potential for conflicts of interest are very high.  Paying out claims reduces profits.  The owners or shareholders of an insurance company, therefore,  have an interest in refusing claims.  The more claims management refuses, the higher their profits. 

Moreover, in any dispute the refused claimant is usually at a severe disadvantage.  In most cases they do not have the financial resources (and as a result of the damage they have suffered which formed the occasion for the claim in the first place, they have usually even less resources) to take the insurance company to court, whilst the insurance company has plenty of resources to fund a legal defence, should they need one. Moreover, they have access to "experts" who are funded by the company: so they are likely to sing from the company's songsheet.

These problems are compounded exponentially when the insurance company is owned by the government, the insurance is compulsory, and the "service" is a statutory monopoly.  When harder fiscal times hit and the government's books are in the red, as now, the owner (the government) has powerful incentives not to pay claims.  The NZ Herald is running an expose upon the practices of the ACC--the state insurance monopoly for compensating people when they have suffered and accident.  It has been alleged that if anyone is over 40, the Corporation routinely puts an injury down to "natural degeneration" and has a bevy of tame "experts" to back their decisions. 

Orthopaedic Association president Gary Hooper said the corporation was taking a similar hard line with many older accident victims.  "ACC is trying to say everyone over 40 has degeneration," he said.

One of Auckland's six or seven specialist spinal surgeons, who asked to remain anonymous, said the corporation was using a handful of retired surgeons and some practising general surgeons as far afield as Timaru to declare that injuries were due to degenerative conditions on the basis of x-rays and scan results, without seeing the patients.  "We are seeing people rejected for no good reason. I've had 40, 60, 100 cases in the last few years," he said. "This is coming to a head. There is a number of us who have to go into bat for our patients on a weekly if not daily basis."

He said the system was unfair because people who could not afford lawyers, and many immigrants who did not know the system, did not challenge ACC's decisions.
Mr Miller (an accident specialist lawyer) said ACC deliberately rejected many people on the basis that only a few would appeal.  "ACC are just acting like these rapacious overseas insurance companies, refusing them holus-bolus on the flimsy grounds of degeneration, because we all have degeneration, and hoping like some of these overseas insurance companies that people won't challenge them," he said.

This situation, if true, amounts to breach of contract and theft on the part of the ACC and the government.  And it rings true, does it not?  This is certainly a circumstance where neither the government nor the ACC can be trusted.  The conflicts of interest are too great.  The remedies, however, are simple, effective, and easy to hand. 

Firstly, make the ACC operate in a competitive environment by allowing other (private) insurance companies compete with the ACC.  (The government has talked about doing this, but has failed to act.  Presumably the minister responsible for ACC, Dr Nick Smith has been captured by the Corporation and is now enslaved to its interests.)

Secondly, regulate to ensure that all medical diagnoses in claims cases be made by independent experts approved by the respective professional associations.  In addition, every company should be required to change the experts they use regularly, in a similar way to the requirement that companies change their auditors periodically.

Thirdly, ensure that courts are accessible to claimants and encourage out-of-court settlements by setting up an industry funded ombudsman with teeth to rule on complaints quickly.

Finally, require annual publication of the claims paid versus refused data, together with actions taken by the ombudsman broken down by company.

These simple measures would go a long way toward mitigating conflicts of interest in the accident compensation insurance industry and cleaning house at the ACC. 

Healthy Scepticism

Beware of Long Term Insurance Contracts

Back in the day some sections or circles of the Christian church ran the argument that insurance was sinful. The reasoning was based on the premise that an insurance contract represented a lack of trust in God's providence and goodness. Purchasing insurance was an unbelieving act.

The argument, although well meant, reflected a fatalistic or deterministic world view that drew upon Islamic theology more than Christian truth. The Christian faith provides strong doctrinal foundations for the rectitude of insurance contracts.

Nevertheless, care and discernment must be used when considering whether to purchase insurance, and what types of contracts to purchase. Careful consideration must be given to the company providing the service, as well as the nature of the contracts themselves. Generally speaking, contracts which offer a one-off lump sum payment are more likely to be honoured than not. Thus, life insurance, lump-sum payments for disability, health insurance, and property insurance are reasonably robust as contracts. But contracts which call for income continuance--that is, purport to provide an annuity stream for a long period of time--should be viewed with a great deal of scepticism.

In the local blogosphere two cases have come up in recent weeks. The first is Whaleoil's ongoing stoush with Fidelity Life which has cost him and his family dearly. The second is Madeleine's war with ACC, which is causing hardship in the Flannagan family. Both involve longer term income payments that the insurance company was obligated to pay, due to illness or injury of the claimant. In both cases the insurance company has taken active steps to renege on their ongoing payment obligations. The modus operandi in both cases has been to use medical "experts" (employed or contracted to the insurance company) to assess the respective injury or illness and determine that the company did not need to keep paying out.

The injured or sick party is immediately placed in a very parlous and weak position. The insurance company has deep pockets with which to purchase "expert" opinion. On its own authority it can terminate or reduce payments. The claimant must take the initiative legally to get the payments reinstated. The process can be long and costly--and by definition usually the claimant is under financial pressure. All the advantage, then, lies with the insurance company.

Income continuance insurance usually has high premium costs and the delivery of the contracted obligation is acutely uncertain. When considering this kind of insurance be very, very sceptical and cynical.

Now, of course, in Madeleine's case it is ACC--an agency of government--which appears to be playing fast and loose. One has no choice about ACC "premiums": they are extracted involuntarily via the taxation system. But this simply serves to reinforce the point: if a compulsory state agency can so easily renege on its obligations through what appears to be very sharp practice, then one should be even more sceptical about self-interested private business corporations.