Definitions and Basics

Insurance, from the Concise Encyclopedia of Economics

Insurance plays a central role in the functioning of modern economies. Life insurance offers protection against the economic impact of an untimely death; health insurance covers the sometimes extraordinary costs of medical care; and bank deposits are insured by the federal government. In each case a small premium is paid by the insured to receive benefits should an unlikely but high-cost event occur….

An understanding of insurance must begin with the concept of risk, or the variation in possible outcomes of a situation. A’s shipment of goods to Europe might arrive safely or might be lost in transit. C may incur zero medical expenses in a good year, but if she is struck by a car, they could be upward of $100,000. We cannot eliminate risk from life, even at extraordinary expense. Paying extra for double-hulled tankers still leaves oil spills possible. The only way to eliminate auto-related injuries is to eliminate automobiles.

Thus, the effective response to risk combines two elements: efforts or expenditures to lessen the risk, and the purchase of insurance against the risk that remains. Consider A’s shipment of, say, $1 million in goods….

Insurance Video and Quiz, a lesson plan at EconEdLink

This video teaches the concept of Insurance. The purchase of insurance involves paying an amount called a premium at regular intervals, with the understanding that if negative events occur, the insurance company will pay certain costs. Play the Kahoot! game to test your skills! This multi-player quiz game reviews the concepts discussed in the video.

Liability, from the Concise Encyclopedia of Economics

Until recently, property and liability insurance was a small cost of doing business. But the substantial expansion in what legally constitutes liability over the past thirty years has greatly increased the cost of liability insurance for personal injuries….

Health Insurance, from the Concise Encyclopedia of Economics

In the thirties and forties a competitive market for health insurance developed in many places in the United States. Typically, premiums tended to reflect risks, and insurers aggressively monitored claims to keep costs down and prevent abuses.

Following World War II, however, the market changed radically. Hospitals had created Blue Cross in 1939 and doctors started Blue Shield later….

Alternative prepaid programs, such as health maintenance organizations (HMOs) (under which total charges are fixed in advance) emerged as competitors to traditional fee-for-services medicine (under which charges rise with usage by people in the covered group)….

Thus, the effective response to risk combines two elements: efforts or expenditures to lessen the risk, and the purchase of insurance against the risk that remains. Consider A’s shipment of, say, $1 million in goods….

Lack of health insurance. One problem is that about 34 million Americans do not have health insurance, and their number has been rising. At least two government policies have contributed to this problem and made it much worse than it needs to be….

Amy Willis, The Best Insurance is the One Yoh Haven’t Used, an EconTalk podcast Extra, January 2019.

Why are Americans so much more likely to be insured through their employers? And is this a good way to insure people’s health? In this episode, EconTalk host Russ Roberts welcomed Niskanen Center economist Ed Dolan to try to answer these questions. Dolan argues employer-sponsored insurance is not effective. What are the negative effects of employer-sponsored insurance as Dolan sees them? Is the main problem one with health insurance or health care?

In the News and Examples

Charles L.. Hooper and David R. Henderson, A Cure for our Health Care Ills, at Econlib, June 2018.

Three prominent and persistent myths helped lead us down the path to more regulation and more government intervention.

  1. Preventive care is a good investment.
  2. When previously uninsured people get insurance, their health will improve, and overall health care costs will fall because many of the newly insured will use office-based doctors instead of expensive emergency rooms for their health care.
  3. Insurance should cover all medical expenses, including inexpensive and predictable goods and services.

Social Security is not the same as insurance: Social Security, from the Concise Encyclopedia of Economics

For most of its history Social Security has been financed on a pay-as-you-go basis. With pay-as-you-go financing, benefits to retirees and other beneficiaries are met by current taxes on workers; income roughly equals outgo, and assets do not accumulate significantly. Pay-as-you-go Social Security systems have large unfunded liabilities….

A Little History: Primary Sources and References

Christy Ford Chapin on the Evolution of the American Health Care System, an EconTalk podcast, June 5, 2017.

Historian Christy Ford Chapin of University of Maryland Baltimore County and Johns Hopkins and author of Ensuring America’s Health talks with EconTalk host Russ Roberts about her book–a history of how America’s health care system came to be dominated by insurance companies or government agencies paying doctors per procedure. Chapin explains how this system emerged from efforts by the American Medical Association to stop various reform efforts over the decades. Chapin argues that different models might have emerged that would lead to a more effective health care system.

Unemployment Insurance, from the Concise Encyclopedia of Economics

The United States unemployment insurance program is intended to offset income lost by workers who lose their jobs as a result of employer cutbacks. The program, launched by the Social Security Act of 1935, is the government’s single most important source of assistance to the jobless….

Advanced Resources

Asymmetric Information and Health Insurance, at Marginal Revolution University

Moral Hazard, at Marginal Revolution University

Related Topics

Roles of Government

Employment and Unemployment

Saving and Investing

Risk and Return