Why Health Insurance & Workers’ Compensation Insurance Are Not True Insurance

Fully funded or level funded traditional health insurance provided by employers is not insurance except for people who buy their own insurance, i.e., the small business owner. To qualify as insurance, the insurance policy must insure the buyer’s assets.

Employer provided health insurance does not protect employers’ assets (get past the idea that the asset being protected is the employee because employees are not insurable assets). The buyer of the policy is not the user of the policy. In some ways it is third-party life insurance. The buyer, in other words, does not have an insurable interest and for insurance to be legitimate insurance, the buyer must have an insurable interest or, as an additional insured, have an insurable interest usually by contract.

Employer provided health “insurance” is an interesting case study of how words matter. By applying the sobriquet, “insurance” to what is really an employee benefit, society’s entire impression of what health insurance should do and can do has become warped, leading to market distortions, political battles, and extremely expensive “insurance.” By misnaming the product, the insurance industry has continually created and battled internal friction.

The best example of this friction is in the distribution channel where agency after agency and broker after broker have tried, and mostly failed, to cross-sell property/casualty and health insurance.

The thought is that both P/C and health are insurance products so cross-selling should be easy, but employee sponsored health “insurance” is not insurance.

A phenomenal trilogy that analyzed cross-selling is authored by Chris Zook from Bain Capital. His analysis addressed how far apart the two products are from one another. The further apart, the lower the cross-sell probability and maybe more importantly, how the odds of financial loss increase. Only the closest products have a decent return on investment such as hamburgers and French fries.

Health Insurance vs. P/C Insurance

Employer provided health “insurance” is a long way from P/C insurance. Health insurance is not true insurance, the decision makers are not often the same, its usage is completely different, the providers (insurance companies) are completely different, and for all practical purposes it is regulated mostly by the federal government rather than state governments.

People can choose from a hundred or more insurance companies for their auto insurance. They can choose from one company for their health insurance or at best, maybe three.

Another difference between the employee benefit known as health insurance and true insurance includes this financial point: true insurance companies take on significant risk resulting in large surplus requirements. Health insurance is a cost-plus model. Whatever the cost, add a profit margin. Health insurers must have some surplus but, especially under the exceptions created by the Affordable Care Act (ACA), that surplus is minimal which may be why so many ACA-created health insurers became insolvent.

True insurance is not a cost-plus model. Costs matter a lot and currently P/C carrier expense ratios are making and breaking companies. In the P/C world, monopolistic or oligopolistic carrier behavior is self-defeating because the spread of risk is too concentrated. In the health insurance world, due to it being cost-plus and not risk based, heavy concentration of market share makes sense and has occurred, especially since the ACA was passed.

P/C insurance protects the insured’s assets in two ways. The first is from specified perils such as fire. If the insured’s house burns down from a lightning strike, their homeowners insurance policy pays to rebuild it. The second is if the homeowner is sued, the policy hopefully responds with defense and a liability payment if required so that the homeowner does not have to pay the settlement out of their savings.

Employer provided health insurance provides neither protection. If the health insurance provides a lesser subsidy to the employer’s employees for asthma, what direct (and it must be direct to qualify as insurance) asset is at risk? Even indirectly, what is really at risk? Some employee is going to be upset because their asthma medication costs $50 more than it would if they worked at ABC company, but they will not likely know that because such information is very asymmetrical.

Health “insurance” is simply a subsidy given to employees to make health care more affordable. As a benefit, the more appropriate name would be “health care subsidy” rather than “health insurance.”

These huge disparities in purpose explain why a health insurance sale and a P/C sale are as different as night and day. A P/C sale involves selling a product the buyer hopes to never use but must have for regulatory reasons, for financial reasons, and to protect their assets. P/C insurance is about protecting assets. P/C insurance is a balance sheet tool.

Health insurance is not about protecting the balance sheet. It is simply an expense hopefully offset by improving employee efficiency, either by attracting better employees and/or maintaining a healthier workforce. Again, employees cannot be insured as assets.

P/C insurance buying decisions are usually in the domain of decision makers in the C-suite (excluding small businesses where the owners make all decisions). Smart decision makers will consider the amount of money they want to spend versus the amount of asset protection they need.

Health insurance purchases are made by someone in HR. That person may or may not be in the C-suite but even if they are in the C-suite, the purchase is based on a budget of $X. The decision makers want a product that limits employee complaints.

Producers selling P/C are therefore not selling to the same people who make health insurance decisions. Health insurance producers are about making life easy for a client’s benefits decision makers. This is why health insurance teams and P/C teams in agencies do not think about sales and customer relationships in the same way. Everything they do is different, from the product they sell, to the daily client interaction, to the nature of how they work with their clients.

Subsidies

Really, no commonality exists between P/C and health except for the wrong name being attached to an employee health coverage subsidy. For the last 30 years the most common complaint I have heard from P/C producers about health insurance producers relative to cross-selling is that health insurance producers sell to P/C producers’ clients but P/C producers do not get the same return benefit because health insurance producers generate so few of their own clients. This complaint is not always true, but it is often true. The reason is that employer provided health “insurance” is really a subsidy provided as an employee benefit. This product therefore fits a servicing personality far better than a sales personality.

A little history may help illuminate the issue. Employer provided health “insurance” did not exist much prior to World War II. The federal government instituted wage and price freezes to help the war effort. With millions of men (mostly) in the armed services, and huge demands on industry to change their production lines and produce massive amounts of war material, a shortage of employable people existed even with millions of women entering the workforce. Companies could not increase wages, so they began offering health “insurance” as an enticement. It was a way around the wage freeze. It was designed as a subsidy to employees from day one but was titled something different for regulatory purposes.

What health insurance producers are effectively selling then are subsidies. What is this year’s premium for a subsidy of $X? How different can two products be between selling a subsidy and selling asset protection?

Workers’ compensation insurance is closer to health insurance than standard P/C insurance. What is the asset being insured? Employees cannot be considered insurable tangible assets. Their health is not being insured either because workers’ compensation only pays after an injury is incurred. The person receiving the benefit is not the person who pays the insurance premium. The insurable interest requirement of insurance does not exist.

Workers’ compensation insurance is a mandated employee benefit. It is a great benefit and ultimately the system brings value to employers and employees. However, it does not meet the requirements of being true insurance. It is closer to true insurance than employer provided health “insurance” because it covers unexpected accidents. It is not a maintenance policy. It is not a cost-plus business model either in most states (some states have effectively devolved to cost-plus models).

Understanding how a similar name changes the impression but not the mechanics hopefully helps save frustration and wasted effort trying to sell products with similar names but with very different purposes in the same way, including hiring people with the same characteristics, and so on and so forth. Aligning skills and setting more reasonable expectations with the mechanics rather than the connotations will lead to much greater success.