William Watson: Taking the gambling out of insurance won’t work

My family and I spent part of the holidays in Las Vegas. Just so you don’t get the wrong idea; that wasn’t our main destination. Our main destination was the Grand Canyon, which none of the four of us had seen. But the cheapest way to get there was through Las Vegas so we ended up spending 24 hours on and near the Strip. I know that what goes on in Vegas is supposed to stay in Vegas but I’ll make an exception here and mention that a couple of us did spend a little money at the blackjack table. One broke even and one ended up ahead.

I didn’t actually play myself—if you have the stock market, who needs blackjack? But I spent a little time watching, which seemed to raise the interest of security guards, who maybe thought I was counting cards. Or maybe the environment just naturally brings out paranoia. The security guards probably look at everybody that way. What was Hunter S. Thompson’s book title—Fear and Loathing in Las Vegas? “Fear and loathing” sounds like U.S. politics these days.

People count cards at the blackjack table to try to figure out what’s left in the deck, so they can improve their odds of making the draw they want. Wouldn’t gambling be fun if you knew what card was coming next? Everybody would go to Vegas. Even I would hit the tables. Of course, after a time, a short time, Vegas wouldn’t have gambling anymore. If players know what cards are coming, it’s not gambling. It’s a sure thing. If the house can’t ever win, let alone win over the long run, there won’t be a house. Vegas would go dark.

I thought of my Vegas experience when reading about discussions surrounding new legislation on whether or not insurance companies can require clients to have their DNA analyzed and share the results with the company. Some consumer groups don’t want any part of insurance companies requiring DNA tests. If insurance buyers want to get their own tests, however, that’s fine.

Testing DNA is increasingly easy. For less than $100 you can have your dog’s DNA analyzed, though probably not as comprehensively as you might want your own done. But if an insurance buyer can test his or her DNA, while an insurance company can’t ask to see the results or make him take another test, that’s like blackjack players knowing what card is coming next while the dealer is still in the dark.

The whole point of insurance is that it’s a gamble. The insurance company, like the casino, can stay in business long-term because although it does occasionally make big payouts there will be lots of people who buy its insurance and never make a claim. By the same token, consumers are willing to pay a premium to get covered even though they might never file a claim because, well, you never know what’s going to happen.

If increasingly you do know what’s going to happen, insurance is no longer a gamble. You buy it only if testing reveals DNA markers of an increased likelihood, in some cases maybe even a certainty, of whatever condition you’re insuring against. Eventually, the only people who will want insurance will be those who know they’re going to need it. But who would buy the stock of an “insurance” company whose clients are all virtually guaranteed to make claims?

It’s not fair if the house wins all the time. But if insurance is going to work, the house has to win some of the time. If we know our DNA profiles but, by law, companies can’t, then, however unsympathetic big insurance companies may seem, the deck is stacked against them. And that’s neither fair nor efficient.