Fiddling with insurance

SOMEHOW THE notion has gotten around in recent years that it is unfair for people to pay different rates for insurance. Thus drivers in Boston and New York City demand a right to the same low auto-insurance rates as those in places with better roads and lower theft rates. Newlyweds, backed by some "pro-family" activists, demand that health insurers provide pregnancy coverage at no extra charge. Unmarried men object to having to pay higher health-insurance rates on account of AIDS, while young women object to paying lower collision rates than young men just because the boys are involved in more accidents (sure, it makes no sense, but that's the power of feminism for you).

Before the insurance industry gets turned into an off-budget arm of the Department of Health and Human Services, someone ought to tell all these groups that insurance is meant to deal in probabilities, like a Las Vegas casino, not in moral deserts, like the Neediest Cases Fund.

There are two groups that find insurance rates unfair. One group consists of those who expect to collect on their policies but don't want to pay the price. Into this category fall the newlyweds planning an eight-child family who want pregnancy coverage for free, the Bostonian whose car has been stolen three times, and the young man who wants cheap life insurance even though he knows he is at risk for AIDS. What these people are objecting to is the bedrock insurance principle that every identifiable risk group should put into the pool the same amount it expects to take out of it.

The second group, whose grievance is more complicated, consists of those who feel that they have been unfairly lumped into a high-risk category. The classic instance is that of the 18-year-old boy who drives very cautiously but still pays high auto rates because the insurance company cannot distinguish him from his less careful classmates. This group complains not that insurers go too far in their central mission of distinguishing among risk groups, but that they do not go far enough. The suggested remedy is often the same: Paul the plug on the actuarial computers, and charge everyone the same rate.

But uniform rates force low-risk customers to subsidize their high-risk neighbors, and that is no recipe for fairness. Why should people who live in brick houses not get discounts on fire insurance?

The cautious young male driver lumped in with his peers has a reasonable grievance. His consolation is that a competitive insurance market creates incentives for all parties to come up with ways to refine existing distinctions; that is how the discounts for nonsmokers and students with good grades got started. (For the same reason, a ban on insurance use of the AIDS test would not be catastrophic to insurers, who would just raise their rates for single men. The real victims of such a ban would be single men who could show negative test results; even if insurers did not ask for the information, such men would be smart to volunteer it.)

An insurance system that merely insures, rather than redistributes, is a mechanism of modest ambition. It provides no remedy for most of the ills that afflict the innocent, grave though they be. The same is true, for that matter, of a banking system or an electric-lighting system that performs its intended function. The goals are modest, and therefore efficiently achieved.