Modern western welfare states often sport government programs named “health insurance” or “employment insurance” in their name. The people who chose those names were lying to you. They are entirely unlike real insurance arrangements in the market.

What does “insurance” mean in general? Some protection from unlikely hazards. Your insurance contract is properly priced when it balances the likelihood and magnitude of your hazard (the average payout) and the price. This is why life insurance is more expensive when one gets older: since the likelihood of death increases as one ages. This is why residential fire insurance is cheaper when one lives near a water hydrant: because the magnitude of hazard decreases due to better/quicker fire-fighting. This is why drivers of sports cars pay more for car insurance: because both likelihood and damage potential are higher. This is why the greater coverage one requires, the higher the cost. The basic math is very simple:

policy cost = administrative cost + probability of hazard * expense of hazard

In other words, on average, every subscriber just slightly fails to break even (since administrative costs are present). In this way, it is just like a lottery, except that one doesn’t want to “win” (suffer the hazard).

Insurance companies employ actuaries whose jobs it is to tabulate the statistical likelihoods / magnitudes of various hazards on various classes of people, in order to generate economically sound policy prices for individuals, or pools containing individuals with similar risk profiles. The market punishes bad actuarial judgement by the insurance companies. If one designates identically priced pools with too great a variation of risk (some very risky, some not risky), then those who are less risky subscribers are overpaying. They are subsidizing the higher-risk peers. Another company with a more homogeneous risk pool can offer lower price for the same coverage to the lower-risk group, and thus they will jump over. Once they do so, the original higher-risk pool will be unsustainable at its original price. In other words, asking one group to subsidize another group leads to failure of the plan. Similarly, companies can compete by lowering administrative costs. Over time, the feedback processes of the competitive market will asymptotically approach ideally priced contracts for individual risk profiles. There is no systematic subsidy: the mathematically expected return of each subscriber is slightly negative.

Does any of that sound relevant to governmental so-called-insurance programs? Of course not.

Take the Ontario Health Insurance Plan, the provincial compulsory public health system hereabouts. How is the policy cost determined? As a fraction of one’s income, “progressively” amplified so that higher earners pay more. It is totally disconnected from the probability (less for younger) or magnitude of risk (higher for older). How are the benefits determined? By governmental bureaucrats, who constantly reduce the list of covered conditions, and possible benefits. (Some are trying to kill those deemed too expensive.) Is there any competition in this health insurance? Of course not. Is there any sort of binding contract at all? Nonsense. Everyone is forced to pay into it some random amount, and might get back some random amount of benefit, totally unrelated to risk & cost. An economically sound health insurance system would charge less to young people and more to old & sick people. Instead, the young, the middle aged, and the wealthy, pay several times more into the system than they take out. They subsidize the rest.

Take the Canadian federal Employment Insurance program, which provides income-replacement money to some of those who lose their jobs. How is the policy cost determined? As a clamped fraction of one’s income, which is related to the payout (magnitude of hazard). Wow! It’s almost as if it were real insurance. But wait: what about probability of the hazard? Nope, the EI system doesn’t take that into account. Everyone pays up to the same clamped fraction, regardless of their history, or the stability of the industry they work in. When the governmental bureaucrats dare tip-toe into that direction, outrage results from those used to receiving subsidies – paying below-actuarial-risk costs. Is there any competition? Nope, a private employment insurance business was basically stomped out by the compulsory federal program. Is there any sort of binding contract? Nonsense. One is forced to pay a non-negotiable amount, and the payout will be at the mercy of the constantly redrawn regulations. Those with regular steady employment are made to subsidize the rest.

I bet that just about every welfare state “insurance”- or “security”- (or even “pension”-) like program in the western world is defective in the same way. They could never work in a free market — that is, if people were free to subscribe to or not, if companies competed with each other to provide programs at appropriate prices. Further, by their compulsory nature and bulk – and sometimes statutory fiat – governments elbow out private competitors. For those fields of insurance where a government meddles, there is very little opportunity for its subjects to find a better deal.

The question of “why would governments do this?” kind of answers itself: because they can. They live to redistribute wealth. They exist to channel subsidies from one group to another. My hope is that, as more people learn to see through the treacherous labeling of these wealth-redistribution programs, the more skeptical they will be of governments pretending to insure, comfort, secure them. While voters may support some wealth-transfer programs, those schemes should stand proud under that banner, and not pretend to be for everyone’s benefit.