The Ethics of Risk Related Insurance

The Ethics of Risk Related Insurance

Sean La Fond

Santa Clara University

Corporate Social Responsibility and Public Relations

Professor Niki A. den Nieuwenboer

12/7/09

The Ethics of Risk Related Insurance

The purpose of this paper is to dissect the practice of risk related insurance and the ethical ramifications risk related insurance has on society. Coming from a background in finance and insurance sales, I have always found the actuarial fairness principle to be interesting. The paper will shed light on why we may need to look at a new system for insurance and why the current system is slowly damaging our society and is not a good long-term practice.

The Ethics of Risk Related Insurance

The new President’s commitment to reform healthcare has put medical insurance and it’s practices of assessing risk back into the national spotlight. This reform takes aim at the very core of risk related insurance and it’s practice of the actuarial fairness principle. The actuarial fairness principle means that people are segmented into groups based on the risk they pose to become either sick or disabled. The purpose of this principle is for individuals to bear their fair level of risk, meaning people will pay less for medical insurance if they are healthy and more if they are unhealthy. This is the opposite view of social solidarity where risk is pooled across a broad population. “Its purpose is to guarantee that certain agreed upon individual needs will be paid for by a community or group,” (Stone 1993).

Medical Insurance plans date back to the 1920’s when they started as non-profit organizations that used a system of “community rating,” where the only condition for coverage was community membership. This is insurance at its purest form. Using the law of large numbers to spread risk across a wide range of people, with the end result being that with only a small percentage of this large group getting sick the premiums collected would cover the...