Insurance products, besides serving the main purpose of hedging to counter financial risk, often also function as investment in mutual funds.
Functioning
As security
This business takes advantage of the fact that risk of a particular kind (house burning down, theft, death), affects a small fraction of a population at any given time, with very high probability. So, it collects fees/ premiums from a large number of insured people, and compensates those on whom a bad event befalls.
When the total fees collected exceeds the money usually lost in providing compensation, there is profit.
Risks to unowned entities
Suppose that you wanted insurance to compensate you for a bad-event befalling someone else: like getting insurance to compensate you if some other company, with whom you have no direct dealing goes bankrupt! Such an interest would make sense if either a] you are making a bet, hoping to make a large profit, or b] the bad event befalling someone else would affect you, because it affects others you deal with.
This happened in the ’credit default swap’ industry, for example in the first decade after 2000; and caused companies (eg: AIG insurance) unconnected (directly) with sub-prime mortgages to collapse.
Health insurance
Negative problems associated with using health insurance as a way of providing an essential public service are described elsewhere.
Negotiation with care providers
Hospitals often form regional or national conglomerates, so that they can negotiate with insurance providers from a stronger position. Insurance providers tend to be fragmented, and patients often side with care-providers, so they often are at a weaker position to reduce costs.
Also, care providers often give discounts to big insurers, by shifting costs to smaller insurers; leading to greater local monopoly.
Unscrupulous practices
Refusal of insurance
People showing any risk factor - being too thin
Denial of treatment
Often insurance companies deny (responsibility to pay for) essential care, claiming that the treatment is unnecessary, or that it is experimental, or claiming that the individual had a preexisting condition which was either not revealed, or was not properly reported or treated before insurance; often with death being a consequence.
Medical directors have the incentive to save money by denying care.
Regulation
If within USA, the state Insurance commissioner can look into complaints of wrongdoing on the part of the insurance companies.
Generic vs branded medicine
Insurance companies may demand that the patient bear a fraction of the cost (copayment), which often turns out to be significant. This is a way the insurer encourages patients to opt for generic medicine rather than much costlier branded medicine. Drug companies retaliate by paying the copayment themselves (through coupons) while getting the insurance company to bear most of the cost.
Policy-types
Benefits: fixed vs comprehensive
Fixed-benefit policies have sub-limits on how much they will pay for various events like hospitalization: it seems that this can be very inadequate - covering less than 1/3 of the cost according to some online accounts. Comprehensive benefit policies don’t have such sub-limits.
Deductibles and premiums
Policies with high deductibles, often carry lower premium - as the insurance now only has to cover the cost of major health problems cropping up. They are often associated with a health-savings account where the employer and emplyoee contribute money. Such funds are described separately in the section on retirement/ health savings funds.
By forcing providers and patients to deal with each other for common problems, competition to benefit the patients is said to thrive.
Claims processing
Some policies make sure that the hospital takes care of insurance claims, while others expect the patient to pay and then get reimbursed.
Multiple policies
In some cases where a person holds multiple policies, one of them acts as the primary policy while another acts as the secondary. In other cases, where there is ambuguity, there is some hassle with insurance companies trying to get each other to pay.
Renewal restrictions
Some policies require a minimum period of enrollment in order to be renewable. Ability to renew is important in order for being able to afford ongoing treatment when the policy expires, and in order to avoid having to tackle the problem of having a preexisting condition when buying a new policy.
For visitors/ travellers
These policies have no incentive to cover preventative care.
Also, even if the hospital charges the insurance company directly, the policy-holder still needs to file a claim in order to establish the authenticity of the claim : something which would not be required for local people.
Buying choices
Decent policies costing less than 50$ a month are available at many places on the internet, including
.
Some costlier policies have limited coverage for acute onset of pre-existing conditions - kvrao.org (India foundation).
Travel insurance bought in the country of travel implies simpler service (due to an established network), and it is likely to be regulated by the government (so that complaints are possible).