sunmaster14
Penultimate Amazing
- Joined
- Feb 24, 2014
- Messages
- 10,017
Quite. It makes them systematic.
Of course they do. You mean that they can be quite properly priced. So can the systematic risk in financial markets.
The "random" (I would say non-systematic) risks are the ones that can be diversified away by pooling them. And with typical universal insurance they are diversified away in respect of the policy holders (IE everyone) too. The systematic risk is paid for (via tax).
Yes, I agree that the random expenses associated with health insurance can be diversified away (aside from the heretofore mentioned pandemics and cataclysms). But the predictable costs are not the same as systematic risks like correlation with the broader stock market (e.g. beta). You cannot predict the broader stock market.
The analogy I would make is between an insured subscriber and a portfolio of individual stocks plus one-year Treasury bills. The subscriber's predictable costs are the annual checkup and the scheduled screenings, plus medication for seasonal allergies, high cholesterol, and whatnot. Those are similar to the yield on a one-year T-bill (or rather the part of the premium assigned to those costs, minus those costs, is the equivalent to the yield on a T-bill). The unanticipated costs - injuries, diseases, or luckily having no problems at all - are similar to the basket of individual stocks. Except that one insured subscriber's basket of stocks is not correlated at all with another insured subscriber's basket of stocks.
Now, if you look at the correlation of two subscribers' portfolios, the correlation will be high, but only because of the presence of the T-bills in the portfolios. If you only look at the interesting part - the stocks - which is the only part which represents risk to the insurer (T-bills are not risky), then that part is uncorrelated.