Cruel and unusual punishment-at least in Woody Allen's heist comedy, Take the Money and Run-is confinement with an insurance seller. But to Boston University economist Ray Fisman, such a tête-à-tête might be paradise. He's cowritten a new book arguing that insurers and insurance "really are much more interesting than you think."
He might even make you feel sorry for them.
Risky Business: Why Insurance Markets Fail and What to Do About It, coauthored with two economists from Stanford University and MIT, focuses on the ever-present, existential threat to insurers: the problem of selection. "Insurance sellers care not just about how much they sell but whom they are selling to. They care, in other words, about which customers they select," the authors write. "And why do they care? Because some customers are much more expensive to insure than others."
That reality creates real-life dilemmas. The book recalls how, in the 1980s, perfectly healthy men couldn't buy health insurance in West Hollywood-though they could anywhere else in Los Angeles County-because that neighborhood was home to many gay men, who were at risk for expensive and then-untreatable AIDS. Nor is public insurance immune. Pre-Obamacare, when some states tried to insure high-risk residents, their efforts collapsed; healthy people skipped enrolling in the state plans, leaving a pool of sick residents that was too small and medically expensive to manage without charging exorbitant premiums. That's why Obamacare required all people, healthy and sick, to have insurance.
Fisman, the BU College of Arts & Sciences Slater Family Professor in Behavioral Economics, and his coauthors examine other types of insurance, from automobile to dental to pet to insurance-like solutions for skyrocketing college costs. Policymakers can outlaw discrimination against the sick and others, the book notes, but they must be careful that such regulations don't saddle insurers with selection-related costs that could bankrupt them. The Brink interviewed Fisman about his book and managing this "risky business."
This interview was edited for clarity and brevity.
