Insurance 101

Health Coverage, Not Health Insurance

Health Coverage Insurance 101

This is the fourth post in a multi-part series, Insurance Foundations.

Now that we’ve defined what insurance is, and taken a look at what makes something insurable, we can finally turn our attention to health insurance. Or, more properly, health coverage. I often prefer the latter term for a very simple reason: we don’t really have health insurance anymore.

That said, I still use the term “health insurance” at times because it’s the more recognizable phrase.

The reason we don’t really have health insurance anymore is simple: medical costs aren’t insurable.

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When Doesn’t Insurance Work?

Insurance 101

This is the third post in a multi-part series, Insurance Foundations.

In my last post, I explained the concept of risk pooling and, at a very high level, how insurance works. Under an insurance scheme, the risk of a financial loss is borne by a group of similarly-situated individuals. Each individual, then, only has to bear the uncertainty. I also talked about translating the theoretical into the practical, and why the goal is stability.

In keeping with that, it’s worth noting that there are a number of situations that are not insurable. Either there’s not enough data to calculate the probability, the risk is more complicated than it first appears, or the structure of the risk itself makes pooling impractical. Any one of those situations would significantly reduce the risk’s insurability, a term which refers to whether or not insurance can be used as a risk transfer tool.

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What is Insurance?

Insurance 101

This is the second post in a multi-part series, Insurance Foundations.

In the last post, I ended by explaining that, in business, risk refers to the probability of experiencing a financial loss. I further explained that the purpose of insurance is to provide a stopgap against the loss after it happens; thus, insurance coverage is ideally the last link of a chain of risk management strategies, rather than being the first.

Insurance is Based on Risk Pooling

To understand how insurance works, it’s important to understand the concept of risk pooling. Risk pooling is a form of risk transfer that is rooted in the fact that, while the probability of an event can be calculated, the specificity can’t be. That’s a lot of mathematical terms in a relatively short sentence, so my usual tactic is to use an example:

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What is Risk Management?

Insurance 101

This is the first post in a multi-part series, Insurance Foundations.

To understand what insurance is, it’s important to start with the basics. It’s hard to get more basic than this: what problem does insurance solve?

The answer is that insurance is one of several tools used for risk management. But it’s important to understand the scope of the phrase “risk management” when used like this. There are all sorts of risks out there — personal, reputational, legal, existential, and more. However, from a business and insurance standpoint, the phrase “risk management” refers specifically to financial risk. Financial risk is the possibility of suffering a financial loss because of circumstances outside your control.

Everyone faces financial risk throughout their entire lifetime. While the probability of a financial risk can be calculated, the exact details of timing, severity, and impact can’t be known until a loss actually happens. As a result, while it’s not possible to create a plan of action for a specific loss, it is possible — and, in fact, well-advised — to create and maintain a toolbox designed to mitigate potential risks.

That’s what risk management is all about. It’s often seen as a subfield of business finance, but more and more, it’s being recognized as a business field in its own right.

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Employer-Sponsored Insurance: Who’s Who

Insurance 101

This past weekend, I made the mistake of getting involved with the comments section on a Facebook post* involving a pre-authorization denial from an employer-sponsored health insurance plan. During that skirmish, someone insisted that there was a contract between the “person who purchased the insurance (employee)” and the health insurance plan.

It’s a perfectly logical statement, but it’s still incorrect. Someone who isn’t familiar with insurance might easily make that mistake.

Unfortunately, it’s also a mistake a lot of insurance professionals might not immediately spot, because the very first day of our pre-licensing training goes over who’s who in an insurance contract. By the time we’re actually out there doing our jobs, the difference is so ingrained as to be automatic — we often don’t even think about it.

The bottom line here is that all insurance plan contracts, including health insurance, involve not two, but three parties.

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