Cherry Picking, Health Care and Progressive Auto Insurance Quotes

The lack of universal health insurance coverage in the American is often attributed to the way U.S. health insurance markets are organized. With the exception of Medicare, Medicaid and other government programs, health insurance is usually obtained from private organizations, usually via employers. While such markets should encourage competition between health insurers and therefore lower rates for customers, many observers point out that such a system has perverse consequences.

For one thing, insurance companies make profits on good risks and tend to engage in practices that either tend to bring in healthy consumers or balance out bad risks with good risks, such as offering lower rates to individuals in risks pools (such as workers in large firms), or advertise at gyms, where only the healthy, or possessors of good habits, tend to go. At the end of the day, an unemployed person trying to buy an individual policy will face extremely high rates. Not only that, if he/she tends to be sickly, the premiums will go through the roof.

What does this have to do with Progressive Auto Insurance? Just as with a health insurance company, Progressive stands to increase their profit margins by insuring safe drivers and not attracting the unsafe ones. I always wondered why Progressive was being so "nice" to us by giving us their own and their competitor’s quotes. Then it hit me: this strategy is a great way to attract good risks (based on actuarial parameters such as age, previous driving record, gender, etc) and drive away the bad ones to other companies. After all, wouldn’t Progressive love to insure Sally, a 35 year old mother of two with a spotless driving record, and suggest that Rex, a 17 year old Mustang driving monster with two speeding tickets, go to the British-accented gecko (or be placed in “good hands”)?

I wanted to test the theory by playing on the Progressive website. Unfortunately, it requires valid e-mail IDs and all sorts of other information that I don’t want to repetitively create/use.

(PS/Aside: The insurance system may also have consequences for health care costs. Each individual insurance company faces particular administrative costs. These costs are often high. Some observers (for example, Paul Krugman) argue that single payer models, in addition to covering all individuals, will be cheaper as well since a single insurer can take advantage of economies of scale in administration.)