Does the Government Insure You?

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We’re Americans. If there is one thing that we always — OK, sometimes — agree on, it is that we don’t like the government meddling in our business. Since I wrote and rewrote that sentence half a dozen times, let’s just take at face value that, more likely than not, folks prefer to make decisions for themselves.

We like competition, we like entrepreneurship, we like innovation, we hate taxes. To me, the folks in D.C. always screw things up and end up charging us in taxes for the opportunity. But ours is a country that encourages private industry, encourages capitalism. There is even a division of the federal government whose sole job is to get money into the hands of the average Joe to help him or her get a business started from the ground up. Yes, really; it’s called the Small Business Administration — a government entity that lends money to prevent the government from doing it directly. Perhaps a bit convoluted, but there it is.

So would it surprise you to know that you may be relying on Uncle Sam for your insurance needs? But wait, you have insurance with State Farm, or Farmers, or Travelers, or The Hartford. You surely don’t pay the government for any insurance policies you have. Not you.

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How the government insures you

Let’s start with the low-hanging fruit. If you are one of the 5 million folks out there who has flood insurance, chances are it is with the National Flood Insurance Program via FEMA. It is a policy that gets its moola from the feds, your premium goes to the feds, claims are paid out by the feds. Mic drop. Done.

Sometimes, the feds don’t necessarily insure you as they do with a FEMA flood policy. Instead, they mandate — which is a pretty way of saying “force” — a private insurance company to insure you instead. Whether that company wants to insure you or not, for one reason or another, the government says it must insure this person, and the insurance company complies. The best example of this comes via the Affordable Care Act, or ACA. Oh yeah, and the policy count for this has been growing year over year and is now around 45 million. Yowza!

If I may cheat a bit and give you an example of even the state governments’ involvement in insurance, look no further than the states of California, Florida, Louisiana, New York and Texas. In those states that definitely govern in different ways, 1.7 million policies are active. Starting to see a pattern?

I’ll give you that the ACA is relatively new, only beginning in 2010. But at the rate it is growing, it’s hard to not see the significance of D.C. having a hand in insurance. If you’re wondering about the biggest example, the 800-pound gorilla in the room, then look no further than Medicare. Yes, Medicare. Our good old friend since 1965, now insuring more than 64 million citizens of our great nation. The entire country has 340 million residents, give or take. Do some quick-and-dirty math, and you’ll see the feds cover, through Medicare, about 19% of the entire country!

Private companies can’t handle all the risk

So we have federal insurance policies. We have federally mandated policies. We have state policies, and yes, somewhere in there are private companies. Private industry, the way we like it. But it is impossible to pretend that private industry handles all the risks. And there is a good reason for it. Let’s explore that briefly.

The concept of insurance is based on the probability of a loss occurring. Based on the probability, a premium is calculated. But what happens if the potential for a loss occurring is so high that the premium that would be required is too close to the actual loss exposure? If the potential loss if $1 million, but you see a premium of $200,000, is it really worth paying that premium, or should you roll the dice, knowing in five years you’ve self-insured and could have that money in the bank?

This happens, and rather than not having an insurance policy for consumers, the feds or the states have these workarounds, if you will. They create a policy or force a private insurer to write it. Like it or not, as risks and their complexity change, we may see a time sooner than we think that catastrophic losses, the likes of which would bankrupt a private company, will have the financial backing of the good old US of A.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Karl Susman is a veteran insurance agency principal, nationally engaged insurance expert witness and broadcast host who translates insurance from jargon to judgment. For more than three decades, he's helped consumers, courts and policymakers navigate coverage, claims and compliance. As Principal of Susman Insurance Agency, Karl works directly with households and businesses to compare options and make clear, defensible coverage decisions.