The Party of Common Sense wants to bring to your attention, as a 2008 Presidential election voter, a growing problem in America: Insurance.

Having recently become a resident of Florida, I know firsthand how the system insurance is broken. First Protective Insurance, the state run insurer of last resort was the only company was willing to write a policy against my condo. I've been told none of the commercial insurance companies are writing policies in Florida and there is a good chance that Florida is going to have to self insure, backing claims above a certain amount as result of a catastrophic event. In examining my policy, I also realized that it's not just rising rates, it is the increasing small print, disclaimers, and excluded items. Just ask the thousands of Katrina insurance victims and insurance companies fighting what damage was caused by floods and what was caused by wind.

And the problem isn't just with home owner insurance, it's with all insurance, as anyone who has tried to insure their teenager with auto insurance knows. If it was one type of insurance or another, we might be able to find problems with costs, increased recklessness or other factors, however across the board insurance rates are exploding, exclusions are increasing, and the uninsured are growing. And when disasters strike, the government is increasingly stepping in bail out insurance companies.

Take the trend towards uninsured Americans without healthcare. Recently released Census Bureau numbers of the uninsured show an estimated 47 million Americans, or 15.8 percent of the population without healthcare coverage. That's 15.8 percent who, if they don't pay their medical bills, will have their costs paid through higher premiums by those with insurance.

Look at the growing trend of having the government step in to cover losses. According to FEMA, in the last ten years an average of 53.3 disasters per year have been declared, in the prior ten years an average of 38.7 disasters per year declared. In the ten years prior to that, 26.2 disasters per year. Why the trend towards more disasters? Could it be that mother nature is getting more ornery, or is the government declared disasters (making available disaster recovery dollars) being forced to step in and cover losses when private insurance fails to step-up?

Health insurance costs are especially egregious, with per person health spending at $7,110 in 2006, more than double the Organization for Economic Cooperation and Development (OECD) average and the highest of the 30 OECD countries surveyed. And costs are projected to increase to $12,320 by 2015. Health spending continues to increase much faster than the overall economy (i.e., gross domestic product, or GDP). Since 1970, health care spending has grown at an average annual rate of 9.9%, or about 2.5 percentage points faster than GDP. As a share of the economy, health care has risen from 7.2% of GDP in 1965 to over 16% of GDP today, and it is projected to be 20% of GDP just 10 years from now.

Politicians are starting to take notice. According to the Kaiser Foundation Poll in August, 2007, in an opened ended question to voters about top concern for the 2008 Presidential election Iraq topped the poll with 42%, followed 27% of respondents that cited health care costs. Politicians are increasingly taking notice and responding by introducing heath care plans. As we go into 2008 we'll need to start picking between candidates and plans. So let's take a look at the core problem - why the increased rates, decreased coverage and increased government bail-outs, and what needs to included to fix private insurance. The core problem, interesting enough, is with information. In this case, too much information. Let me explain.

Most people understand the basic principle of insurance. When we insure, a group of people get together to form insurance against a random event: house fires, acts of god, accidents, sickness, and the like. Everyone contributes to a single pot of money and the risk is spread among the group. Get a large enough group and the insurer can statistically figure out how much they are likely to payout, and collect enough money to cover those expenses. For example, for years you may pay $1,000 year for house insurance and in those years your premium is covering the claims of others. But then one year the old oak tree outside of your house falls and does $10,000 damage to your house. You collect $10,000, supported by the premiums of others that have no claims that year. The problem is that insurance events aren't as random as we think. The more we look and divide and subdivide, the more we can categorize that risk. You’re not longer part of the group of the town residents, but rather of a very specific sub-group. Lower risk and your premiums go down, higher risk and the premiums go up.

Let's take a hypothetical town of 10,000 residents. To support the fire department, the town taxes each resident $100/year. This provides $1,000,000 budget to cover collecting the fire service tax, the fire equipment, fire house, employees, etc… Let's say the fire department gets 100 calls a year. At that rate, statistically many people will live their entire lives without ever needing the fire department, but several residents may make several calls.

In our hypothetical town, a new mayor is elected and decides the town government shouldn't be in running fire departments. He privatizes the fire house. For each of the 100 calls it goes out on a year, it will bill the resident requesting service $10,000 (=$1,000,000 budget/100 calls per year). Since most residents can't afford a $10,000 unexpected bill, residents are expected to get insurance. So a company called FlatCo is created that sells fire department insurance to each resident at the rate of $100 per resident. The underlying service hasn't changed, only the group collecting the insurance is now a private company, versus the town government.

Then, in the true nature of competition, a new company called NewCo comes to town. They've done some research and determined that statistically those residents that have a smoke alarm and a fire extinguisher are less likely to need the fire department then those residents that don't. Therefore, they charge $90/year for those with smoke alarms and fire extinguishers and $110/year for those without. At the end of the first year after NewCo comes to town, most of those residents with home fire equipment will renew with NewCo at $90/year, and most of those that don't will renew with FlatCo at $100/year. Since FlatCo has higher risk customers, they lose money and are forced to follow NewCo's lead and create two pools of customers. But FlatCo goes farther by doing additional statistical work and creating new discounts to those that don't smoke and raise premiums on those that do smoke. Newco responds by creating additional discounts for owners of new houses, and raises premiums on those owning old houses, etc., etc… At some point both NewCo and FlatCo have identified those residents that most likely to need fire department support, and raised rates to the point of discouraging having to insure those high risk customers, or even going as far as refusing to cover those customers. To improve profits and undercut their competitor with lower rates they add exclusions, such as not covering fire costs that are a result of smoking, burning waste, and the like.

The result of all this is that rates have been lowered for some customers and raised for others. It now better shows the true risk for individual residents. However, since insurance is no longer mandatory, not everyone is insured. The insurance companies have turned away some customers, and there are those residents that self select not to be insured. Some residents are put into high risk groups and simply can't afford the premiums and others are very low risk customers and figure they aren't likely to use fire department support, so they decide they'd rather use the premium for something that provides more immediate gratification. Since everyone isn't insured, after the first couple of years the fire department finds that a portion of their $10,000 fire service bills are not being paid - issued to customers without insurance and without the means to pay their bill. Therefore, they raise the bill to $11,000 per call to cover the deadbeats. That means insurance rate increases, resulting in few people who want to be covered and the vicious cycle of more uninsured and fire department rate increases continues.

You can see the problems. If you were unfortunate enough to be lumped into a small group of high risk customers, say you were the owner of a all wood 100-year old farm house heated by a wood stove, you're forced into a high risk group with very small number of members - resulting in huge premiums. It is easy to see how those with the most need often are those without insurance.

The brass ring of insurers is to have perfect knowledge of your insured base. For example, if a healthcare insurer were able to perform a genetic test to determine those that are going to get sick with a genetic illness like cancer, they would be able to exclude those testing positive from coverage or charge them outrageous premiums that will better reflect the true costs associated with those illnesses. Meanwhile, testing negative would get reduced premium rates. What is actually happening is that this additional information is really causing us to lose the ability to spread risk across large groups.

Some people would say, why should they subsidize those that are at higher risk, especially if those risks are self selecting? Should someone with house insurance that lives inland subsidize those that live on the coast? This is an understandable argument, however, at what point does insurance become self-insurance, where you are a party of one? According to the Kaiser Family Foundation in 2004 almost half of all health care spending was used to treat just 5 percent of the population and just under a quarter of health care spending (22.5 percent) went towards the treatment of the top 1 percent of the population. You can see why insurance companies would love to exclude those in the highest need of insurance.

However, large companies are able to get insurance at reasonable rates. Why? In a large company policy, the insurance company can't sub-divide that group or exclude individuals that might be high risk and, in exchange, the company agrees to give all their business to the one insurer - meaning individuals can't self select out of the group. The lesson seems to be that we need to make sure everyone is included and risk is spread out and not assigned entirely according to actual risk.

As voters being to examine politicians plans to fix insurance, The Party of Common Sense has put together some basic rules for any plan. Keep in mind, this isn't meant to be an argument for socialized insurance systems - it can remain private, however, politicians have to set the rules:

Rule one would be to make sure people we are truly spreading risk among a statistically meaningfully large and diverse group. We, as society, have to accept that insurance may for some be charitable event. If you were fortunate enough not to be born with a lifelong illness that will require constant medical care, then some of your premium will likely be subsidizing someone less fortunate than yourself. We need to prohibit the subdividing the groups into too many risk levels and varying rates according these risk levels.

Rule two would be set the rules on what can/cannot be excluded. People need to understand what they are buying and it should be black and white. Let's get rid of court fights over wind or flood damage - it was storm damage and should be covered. Politicians should minimize exclusions, especially protecting those most vulnerable such as citizens with pre-existing conditions. No insurance company wants to bring on that expense, yet these are the group that is in most need of insurance. Unless the government mandates insurance companies cover these high risk groups at reasonable rates, we lose the purpose of insurance.

Rule three, we need to make sure everyone is insured. With information, high risk customers are self selecting full insurance coverage while low risk customers can chose partial or no insurance coverage. Its only by having a mixture of high and low risk that creates a healthy insurance pool.

The problem of too much information is only going to get worse. As technology advances and more information exists it will only be easier to divide and subdivide insurance pools: extracting those that are profitable from those that are cost burdens to the system. The system is broken for everyone. Insurers don't want to have to stop writing policies, or to deny coverage because of some exclusion, or to figure out how to sub-divide a group to undercut pricing to steal profitable customers. Individuals are crying out for reasonable rates. Upstanding citizens are disgusted by having to cover the uninsured. The time to tackle the insurance problem is now.

Although The Party of Common Sense is generally in favor of laissez-faire approach, unfettered capitalism doesn't always work in the best interests of the whole of society. The FDA creates rules to ensure our food and drugs are safe, the SEC and Fed creates rules to ensure our financial markets are safe, the EPA and OSHA creates rules to protect our environment and workers, so why shouldn't the government create rules to protect the integrity of the insurance market?

The recommendations in this essay are truly Common Sense. Going into the next election, The Party of Common Sense recommends voters carefully evaluate politicians healthcare reform plans to ensure they adhere to The Common Sense Rules in an effort to nurse our insurance industry back to health.