Marine Insurance shows why Obamacare won’t Work

Posted by PITHOCRATES - February 22nd, 2014

Week in Review

As ships began to ply the world’s oceans some of them did not make it to their destination.  Instead, they ended up on the ocean floor.  The financial loss for a ship lost at sea was enough to bankrupt a shipper.  Which greatly inhibited early transoceanic trade.  But then the good men at Lloyd’s of London began selling marine insurance out of a London coffee house.  Spreading the risk of a large financial loss across all shippers.  Where each shipper paid a small fee (i.e., an insurance premium) to cover the financial loss for the few ships that sank.  It was an excellent system.  Mitigating the risk of the very risky transoceanic trade.  It worked so well we still use it today (see Ship loses more than 500 containers in heavy seas by Tim Lister posted 2/22/2014 on CNN)

On any day, between 5 million and 6 million containers are on the high seas, carrying everything from potato chips to refrigerators. But not all of them make it to their destination, as the crew of the Svendborg Maersk have just found out.

Their Danish-flagged ship was in the Bay of Biscay last week as hurricane-force winds battered the Atlantic coast of Europe. Amid waves of 30 feet and winds of 60 knots, the Svendborg began losing containers off northern France. After the ship arrived in the Spanish port of Malaga this week, Maersk discovered that about 520 containers were unaccounted for. Stacks of others had collapsed.

It’s the biggest recorded loss of containers overboard in a single incident…

The Through Transport Club, which insures 15 of the top 20 container lines, has put the loss at fewer than 2,000 containers a year. But other industry sources say the number may be as high as 10,000. That would still represent far less than 1% of the containers traversing the world’s oceans. Maersk, one of the world’s largest lines, says that its highest annual loss in the last decade was 59 containers.

If we crunch some numbers we can see how insurance works.  Let’s make some assumptions.  Conservative ones.  Let’s assume the low end of 5 million containers.  And the high end of lost containers (10,000).  This puts the total loss of containers at 0.20% of the total shipped.  Which means that 99.8% of all containers shipped reach their destination.  So the insurance pays for a very small number of lost containers.  Now let’s assume an average value of $250,000 per container.  That makes the value of all containers shipped $1.25 trillion.  And the value of containers lost $2.5 billion.  Or 0.20% of the value shipped.  Which is a small fraction of the total.  If we spread this amount over each container shipped that comes to an insurance premium of $500 per container.  A small price to pay to avoid a $250,000 loss.

This is why marine insurance works.  Because it’s insurance.  Where shippers pay a small premium to insure against a very large possible financial loss.  Which is why Obamacare won’t work.  Because Obamacare isn’t insurance.  Neither was health insurance before Obamacare.  Because people expect a free ride.  If they have ‘insurance’ they don’t want to pay for anything.  Which isn’t how insurance works.  That would be like shippers having someone else pay for their marine insurance.  And then expect to ship things across the ocean for free because they had insurance.  Marine insurance doesn’t work like that.  And neither should health insurance.

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