Everyone loves insurance, right?
Healthcare and Insurance. The words only evoke fear, discomfort, and general fear, don’t they? I mean, I definitely hate hearing those words, much less the cost that is being deducted from my salary each month. Yet they are still an integral part of our lives in the developed world. And in case you haven’t noticed, the rewards are ridiculous – and just keep getting worse. But why?
Let’s do a basic run through.
Insurance companies make a profit by promising to cover the cost of a damaging event for a monthly cost, also known as a premium. This premium is collected in a fund contributed by the insurer’s customers – the premium payers – whereupon the funds are distributed as needed to cover the insurer’s obligations. Now you can imagine that at some point this fund would grow so large that the insurer would be wise to use a percentage of the fund on investment vehicles to get a return on the pool’s cash. If you don’t increase your money by investing, you will only lose purchasing power from money inflation. In that case, they might as well be Pablo Escobar and have some of their money literally eaten up by rats.
Today, the essence of the nature of insurance is to identify and manage risks and risks while diversifying cash flows to offset any fluctuations in the macroeconomic outlook. The end result sought is, of course, to minimize risk so that they can withstand unexpected shocks (like a global pandemic leading to a complete economic stalemate that unfolded within three to four months). You have to do all of this while investing capital. This risk mitigation strategy also includes the risks associated with the investment and capital allocation. This necessarily includes currency devaluation due to inflation.
Because of this, because of their lack of risk (albeit implied risk-free), Treasuries are a popular vehicle and are guaranteed an interest rate yield on the allocated capital. This return represents the capital raised by taking the risk of passing cash on to the Treasury Department for disbursement. The problem, especially lately, is that treasuries (this includes bills of exchange, notes, and bonds) lose their strategic value when inflation exceeds their yield. In this type of landscape, it makes more sense to allocate capital to assets that are scarce and desirable – assets that are reasonably isolated from the manipulations and difficulties associated with human-led governments and organizations.
Thanks to this relationship, the insurance sector is under pressure from several sides. A December 2020 review by Deloitte identified the various stress flows in the industry. The year 2020 brought incredible stress to the insurance industry that has never been seen in our lifetime.
First, there were many medical costs due to COVID-19. Then there was the riot that accompanied the outrage of the George Floyd incident, which caused widespread damage to homes, shop windows, and private property. The insurers certainly had their hands full.
Second, because of these two historic events, the US government and the Federal Reserve decided to help the country’s citizens and businesses by delivering stimulus packages. This massive injection of cash included not only Small Business Administration (SBA) loans and top corporate loans, but also grants to the public to cover the loss of income due to mandatory statewide lockdowns.
While this has been a godsend for many citizens, it has also created some problems. To ease the need for simple credit to keep the flywheel of our fiat economy going, the Federal Reserve cut the interest rates on credit – to practically zero. This made home loans cheap, car loans cheap, credit cards cheap. It made all credit cheap. This also applies to Treasuries. And we remember that Treasuries are a very important part of an insurer’s investment strategy. With zero interest rates, companies and individuals will be further removed from these safe haven havens to protect their capital from inflation. You need to take more risks just to get a balanced return against inflation. This is a process that is being forced further out onto the risk curve.
If we turn to health insurance, premiums have skyrocketed in the last few decades. I would like to provide a few words from Steven Brill from his book “Tailspin”:
“What is not so widely recognized is that the cost of hiring workers for employers has increased by at least 30 percent in inflation-adjusted dollars because their health insurance costs per employee have increased by more than 300 percent. If healthcare costs had only kept pace with inflation, employers would have much more time to pay their workers wages. “
Are you kidding me?! Three hundred percent. If this quote doesn’t drop your jaw as an employee and your employer just laughs out loud, then you are completely clueless. Employers literally cannot afford to pay their employees their fair rewards! Here is another example:
“From 1980 to 2016, personal contributions to health care (in deductibles and co-payments to the insurable costs as well as in the employee shares in the premiums of the employer health insurance) rose by 460 percent. ”
Four hundred … and sixty percent.
My wallet hurts, and so does my body
We all pay hand-over-fist for insurance. Why is this?
Well, if we start with the very basic and elementary breakdown that I gave you earlier, we can paint the ugly mosaic.
Time for a quick example:
Let’s say 100 people pay into a health insurance product pool. And let’s say five of these people develop a serious illness that puts a significant financial burden and pulls money out of the pool. How does the insurer continue to meet these expensive obligations and at the same time protect possible future obligations to other customers? The insurer collects the premiums either for the individual or for all customers.
That’s a very, very basic breakdown. But I believe it should give a break to many who try to blame insurers for the reality we are in. The next question is: what causes such high premiums?
Okay let’s see. According to a meta-analysis published by the NIH in February 2020, 78% of Americans will be considered overweight, if not obese, by 2030. And globally, the number of cases of depression increased by 50% from 1990 to 2017. This is terrifying given the CDC reports that depression rates rose sharply during the 2020 lockdown, claiming that depression rates in American adults rose by 40%. Additionally, this study, published in September 2020, predicts that global diabetes cases will increase by 10% in the next decade. Just over 10% of Americans are already diabetic – about 34 million – and that number is increasing day by day.
And then, by some estimates, 37 million Americans will be prescribed antidepressants.
All of this implies a lot of constant health care costs considering that so many of the “solutions” offered by vendors are large pharmaceutical products.
Have you wondered why the health insurance premiums are so high? And why can’t more employers afford to pay their employees the wages they deserve? I think we know why.
Do you remember the previous article where I talked about how corporate lobbying can have serious public health implications? And you want to go ahead and add that mix of problems with the ones discussed above? So health insurance and unemployment insurance have enormous weight. Then add this little tidbit from Investopedia:
“It is common for insurers to be involved in one or more different insurance businesses such as life, property and casualty insurance. Depending on the degree of diversification, insurance companies are exposed to different risks and returns, which means that their P / E ratios differ in the industry. “
So 2020 saw a series of unfortunate events that left every insurer feeling heavily burdened. What is the solution?
One simple solution
“For every problem there is a solution that is simple, orderly and wrong.” – HL Mencken
While these words may sound true for some problems, I prefer to rely on the words and thoughts of someone who, unlike Mr. Mencken, saw value in simple solutions;
“The first time you try to solve a problem, the first solutions you find are very complex and most people stop there. But if you go ahead and live with the problem and peel more layers of the onion, you can often very elegant and simple solutions come up. ” – Steve Jobs
My solution is really more of an aid. It’s the same vehicle I mentioned in my previous article, but for an entirely different reason. Bitcoin.
Insurers should add Bitcoin to their balance sheet as soon as possible. Not only is it an inflation hedge for many investors, but it is also a source of significant alpha given the scope of Bitcoin’s current adoption numbers, as well as Bitcoin’s appeal to the world’s greatest minds. By buying Bitcoin, insurers would not only protect part of their balance sheet, but also gain both valuation gains and the quality of their workforce. Our insurers must employ Bitcoin-experienced staff to help them train the current employees on how Bitcoin works and then build the infrastructure to hold the asset in custody. They will also need experienced bitcoin traders to keep their company’s exposure within the limits set out in their prospectuses. Trading in a literally 24/7 market with no breakers is a whole different beast.
It’s not noticeable. It’s not that complicated. It’s a very simple solution.
This solution is not free from the effects of fear that will lead to cycles of irrational behavior in both people and the financial markets as a whole. Discretion and humility are therefore paramount. Do not stack more than you can handle during extreme market events.
Hodl Bitcoin. Stack your sats. Protect your keys.
Get your future back.
(Next, I think we’re going to look at how our current zombie plague is impacting not only investment strategies but innovation as well. If you like my footage, follow @bitcoinmagazine so you don’t miss out on what I do next thing to say.)
This is a guest post by Mike Hobart. The opinions expressed are solely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.