Why Does Insurance Seem to Cover Less Every Year?

Over the years, many have noticed a significant shift in insurance coverage. What factors contribute to this change, and how does it affect consumers?

The Role of Interest Rates

One of the primary reasons for the decrease in insurance coverage is the current low interest rates. Historically, when interest rates were higher, insurance companies would use their investment income to expand their business. They would offer wide coverage to attract more customers, and then they could generate extra returns from the cash flow and additional claims reserves, even if the cost of managing and paying claims was around or over 100% of the premiums. With today's low interest rates, this model has changed dramatically.

Regulatory Changes and Secure Investments

Regulators now require insurance companies to invest a large portion of their funds in extremely secure investments like government bonds. The returns on these investments are very low, forcing insurers to focus on the coverage they offer to make a sufficient profit on the risks they underwrite. As a result, they are removing certain benefits, imposing stricter conditions, and trying to raise prices.

Personal Example: Travel Insurance

A personal example of this change is in travel insurance. Now, travel insurers are asking customers to disclose any medical conditions they have ever had, even self-limiting conditions that required just a single course of antibiotics. This has created a situation where travel insurance is being quoted at nearly the same price as my fully comprehensive car insurance, which provides unlimited liability for third-party claims. This shift in requirements is a clear example of the changing landscape of insurance coverage.

The Role of the Affordable Care Act (ACA)

The Affordable Care Act (ACA) has also played a role in this shift in insurance coverage. By law, the Secretary of Health and Human Services sets new out-of-pocket maximum limits for health insurance plans each year. Since the implementation in 2014, these limits have increased annually. This increase has the effect of shifting more costs to the consumer.

The ACA defines the "actuarial value" of Bronze, Silver, Gold, and Platinum level plans. In simple terms, the metallic plan tiers are supposed to cover 60%, 70%, 80%, or 90% of the allowable costs up to that out-of-pocket maximum. As the out-of-pocket maximum ratchets up year after year, this has the effect of shifting more costs onto the consumer. Insurance carriers are also narrowly constrained in how they can design their plans to fall within the legal requirements of the ACA.

This is why copayments are getting larger, or disappearing entirely, and why deductibles are continuing to go up each year. These factors are not driven by healthcare inflation, which is primarily addressed through premium costs, but by legislation. If you are not happy with this situation, thank a Democrat in Washington, as this was their idea.

Conclusion and Final Thought

Insurance companies are businesses that operate to generate profit, and they are taking steps to adjust their coverage and pricing to meet regulatory requirements and maintain profitability. While this can lead to fewer benefits and higher costs for consumers, understanding the underlying reasons can help you make more informed decisions and prepare for what to expect in the future.