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Insurance: n.
An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.

—A
MBROSE
B
IERCE

I
n January of 2005, Marsh & McLennan, one of the biggest insurance brokers in the United States, agreed to pay $850 million to settle charges that they had engaged in bid-rigging and taken kickbacks. Marsh was supposed to find insurance plans for companies, but they faked wildly inflated bids to sell mildly inflated bids, and then got commissions from the insurers, who benefited from the cunning little scheme. They would neither confirm nor deny these allegations, of course, but they agreed to pay, apologize, and mend their wicked ways. New York State Attorney General Eliot Spitzer, who led the Marsh probe, has been handing out sheaves of subpoenas to insurers, alleging widespread corruption throughout the industry. Nobody bid-rigs alone, and bid-rigging is but one of the infractions investigators are considering. Aon, ACE, AIG, Aetna, Cigna, Hartford, and MetLife are some of the giant American insurers who are the objects of Spitzer’s latest blitz. Though his detractors claim that this is another well-publicized crusade en route to his impending campaign for governor, attorneys general in other states, like California and Connecticut, are following Spitzer’s lead, and have also started issuing subpoenas to insurance companies.

I don’t think Spitzer’s insurance probe is a Machiavellian ploy, but if it is, it is a damn good one. I think a lot of people are wondering where, exactly, their premiums go, particularly when those premiums are rising precipitously. The most hotly contested issue in recent elections in my neighborhood, specifically Nova Scotia and New Brunswick, was car insurance. People were pissed about double-digit premium increases, and they demanded that all the candidates speak to this issue. Some demanded that the candidates commit to the establishment of public auto insurance, as they have in Saskatchewan and Manitoba. Others demanded that the candidates pass legislation curbing the outrageous rate hikes. The Nova Scotia government ended up negotiating a soft-tissue injury claim cap in exchange for lesser increases, a decidedly industry-friendly solution. In February of 2005, when the Canadian insurance industry reported making a record-breaking $4 billion in profit in 2004, the headlines, even in staid papers, used words like
obscene
and
outrage.

This insurance ire is one example of the resentment that smolders in the hearts of policyholders across this great landmass. The insurance industry may not be as obviously synonymous with bullshit as advertising or politics, but people are becoming more and more frustrated with its escalating costs and baffling verbiage, given that they have to have insurance if they want a house or a car or, in the United States, to not die. Lawyers have been milking insurance rage for a long time. Insurers are being sued in scores of suits, class action and individual, meritorious and spurious. The Web fairly teems with sad stories by the screwed. Folks stuck at home, sick and waiting for a settlement, have all the time in the world to put up Web sites detailing wildly ungrammatical tales of their insurers’ hardheartedness, ranging from failure to pay for repairs and medical care to denying or delaying benefits and stalking of policyholders who have submitted claims. The industry, for its part, claims that premium increases have everything to do with the dot-com market bust, costs associated with September 11, ridiculously generous jury awards, and fraud on the part of malingerers. They have nothing to do with their billion-dollar profit margins.

The rage may be relatively new, but insurance is hardly a new kid on the bullshit block. It’s almost as old as misfortune itself. Maritime cultures going back to the Babylonians had some form of risk pool to cover expenses stemming from the hazards of trading missions. If the boats sailed off the edge of the world into the gullet of a sea serpent, someone had to cover the loss of cargo, craft, and crew. Lloyd’s of London, the most venerable of the world’s insurers, set up shop in a coffeehouse in London in the late 1600s to do just this. Wealthy patrons signed their names at the end of a contract outlining how much risk they were willing to undertake. This is where we get the term
underwriter,
one of the many archaisms preserved in the wordy world of insurance. Insurance set up shop in the colonies early. Benjamin Franklin was one of the founding fathers of the Philadelphia Contributorship for the Insurance of Houses from Loss by Fire, one of America’s first insurance companies, chartered in 1752. The actuarial set have had a long time to refine their arts and have cooked up a field of endeavor that, when practiced irresponsibly, is the el nacho grande king hell scam of all scams. Because you, dear policyholder, don’t have to understand the arcane lexicon of insurance or even read your interminable and inscrutable policy; no, you just have to buy it.

Don’t get me wrong. I have no quibble with the notion of a risk pool, or with people investing the interest from the funds in that risk pool. Like the corporation, insurance is a good way to accumulate capital for risky ventures. We need insurance to keep jets in the air, boats on the water, and companies in business. Most of the remaining public-spirited government programs are effectively insurance programs, safety nets that kick in when misfortune befalls you. This is how commercial insurance markets itself, but do not mistake insurers for public trusts, even though the product the insurer is selling to the public, is, for all intents and purposes, trust. Insurance isn’t a product like a frosty Coke, or a service like getting your hair done. Instead, you pay the insurer for the promise of a service or a settlement, in the event that you require it. It’s a gamble.

Most people buy insurance hoping they will never need it, fearing that they might. Almost every soft, squishy, vulnerable being with a few affectionate ties and a reasonable accumulation of possessions has a reptilian spot in their brain that houses panic, the fear that they will lose it all. Sure, you can whistle while you work, and saunter down the sunny side of the street, but even optimists know full well that you could roll your leased SUV on a cruddy stretch of highway and be a vegetable for the rest of your days. What would the spouse and kids do then, hmmm? How about a house fire? Care for a cancer?

All this scary shit is the sweet spot for insurers, the little nub of fear the industry massages with its actuarial fingers until the money flows. “Buy a policy,” says the soothing voice of insurance, “and we’ll take care of everything.” Besides, if the fear don’t move you to buy insurance, the bankers and the law will. You have to have insurance to have the big-ticket things. Your bank will demand insurance as a condition of the mortgage, since it’s their house, in effect. Auto insurance enjoys the distinction of being something people must purchase by law. Even if you don’t have a house or a car, and don’t own much of anything, you’re still dragging around that perishable carcass of yours. And when unfortunate Americans need appendectomies, or are midway through massive coronaries, it can’t help to have to wonder how much the fucker is going to cost.

Insurers do not wish any ill upon their customers. Au contraire: they are your friend, your neighbor, your little piece of the rock, the good-hands people, the ones who’ll be there, check in hand, after your house vanishes up a funnel. They want to see you hale and hearty and frolicking in a meadow of wildflowers with your loved ones. If insurance companies had their druthers, all their cherished policyholders would be fire-retardant, impeccable motorists, immune to everything, and immortal, but unaware of their superpowers. Insurance companies shake the money out of your pockets by promising to take care of you, but they only get to keep that money if you don’t require any care. Let me run that by you one more time, since it blows my tiny mind: Their profits depend on policyholders not demanding the money formerly known as theirs.

An insurance policy is a wager, and the insurance industry is a Las Vegas of morbidity and misery. Insurers look at risk factors (your health, age, lineage, and demographic wedge) the same way a poker champion eyeballs your body language and all the cards he can see, calculating odds based on available information. If you’re holding a crappy hand—family history of cancer, a string of drunk-driving convictions, a two-pack-a-day habit—insurers charge you higher premiums. Of course, once you are insured, the quickest way to make it clear that you present an undesirable level of risk is to actually file a claim. If you have the temerity to require the care you’ve been paying premiums for, you can expect those premiums to shoot up. After all, nothing shows an unseemly taste for an extravagance like medical care quite like actually needing medical care. This is what makes insurance a totally perverse commodity. Deductibles and premium increases after claims filings mean that it is often cheaper to pay for the garage or the stitches yourself. That is certainly way cheaper for the insurance company, too. They call it “customers assuming responsibility for their own risk management.”

In the States, the insurance industry has two underwriting branches, property-casualty and life-health. P&C covers car crashes, house fires, and hurricanes; L&H handles your checkups, your cancer, and your coffin. In the Great White North, as you well know, basic health is covered by taxes, not premiums, but we still have private prescription, dental, life, and P&C. In the U.S., the P&C sector is not regulated by federal law. Insurance companies are regulated by an uneven patchwork of state laws, and they’ve lobbied since the forties to keep it that way. Through the nineties, property and casualty was the less lucrative of the two sectors, thanks to more sales and higher prices for life and health insurance. Annuities—life insurance policies that involve an investment component—were the fastest-growing insurance product, reflecting the stock-mad sensibility of the times and the anxieties of an aging population. Over the decade, annuities sold so well that they caught up with, and then sped past, total premiums for auto insurance. Annuities are also pricier than the product they tended to replace, term life, and the switchover was a boon for the industry. Health insurance prices have been increasing steadily since 1989. Premiums have gone up by at least 10 percent a year every year since 2001.

At the same time, in the P&C sector, too many companies were selling insurance for any one company to make a truly sweet profit. This is, by the way, one of the many reasons why your premiums will be going nowhere but up, up, up for the next couple of years. Welcome to the underwriting cycle, where prices tend to fluctuate every three to five years. When there was a highly competitive market during the nineties investment boom, underwriters sold P&C policies at slashed premium rates to get as many customers signed up as possible, effectively saturating the market with inexpensive policies. Hey, you can always jack those premiums up once people have signed on the dotted line—which is precisely what they’ll be doing for the next few years, since the property and casualty business claims that it has just had a few shitty years.

The year 2004 was awful, thanks to a succession of hurricanes, resulting in over $20 billion in claims. Thanks to September 11, 2001 was bad too, the most expensive single disaster the insurance industry has ever had to cope with. The attack affected many sectors of the insurance industry, from life to property to aviation liability. The industry’s latest estimates show that insurers are on the hook for about $40 billion in claims. This is more than double the most expensive natural disaster, Hurricane Andrew, which cost them about $15 billion. Insurers briefly entertained invoking the act of war clause to dodge the costs, since the president was referring to terrorism as war, but they soon realized that this probably wouldn’t survive a court challenge, or the court of public opinion. Fortunately, over a hundred companies carried a portion of the costs, so only a couple went down in flames, primarily aviation underwriters. Reinsurance, or insurers insuring insurers, has played a crucial role in spreading the costs of September 11, as reinsurers are in for over half of the projected costs.

Insurers successfully lobbied the government for “backstop” funds to help meet their financial obligations without imperiling their liquidity or reserves, and they also pushed for a terrorism exemption. Though the act of war exemption, an industry standard since the nineteenth century, was verbally loose enough to fit September 11 because it includes acts of undeclared war, the industry pushed for a clause specifically excluding terrorism. Both demands became law in 2002, in the form of the Terrorism Risk Insurance Act. This means that taxpayers, rather than insurers, will bear the majority of the cost of future terrorism. Policy renewals no longer cover acts of terror, or specifically exclude chemical, biological, and nuclear acts of terror. The exclusion was important to the industry not just to decrease their risk exposure, but to secure the silver lining of all of these terrorism costs—a burgeoning market in expensive terrorism coverage packages. It’s the genius of capitalism!

Free-marketeers love to make the choice argument, and extol our absolute freedom to buy. The choice argument kind of hits the fan with a bizarro product like insurance. Do people really choose to get insurance? Um, no. When people go for retail therapy, they buy shoes, video games, and ice cream, not term life. While you are free to choose your insurer, you only get insurance if they choose you. Once you have insurance, what are your choices, should they refuse your claim? Well, you can choose to pursue an internal appeal, or sue, at which point they will probably choose to drag out the jeezly claim for as long as is bureaucratically possible. Yes sir, a whole lot of choice going on there.