What really is insurance? Here is what it should be in a free world: the exchange of regular, predetermined small payments (premiums) for the coverage and protection against a possible, improbable, but large loss that might occur, according to the terms of the contract that both parties voluntarily agree to. If a person wants auto insurance, then they are afraid that, one day, they might get in such a huge accident that they can’t pay the damages, although the likelihood of such an event is small. They could decide to save a lot of money for such a rainy day, but for many people this would take decades to build up, and they might have an accident before enough money is saved. So, they minimize the risk of catastrophic losses by choosing to pay regular, small, affordable payments to an insurance company in exchange for coverage. Over time, a particular individual may have only paid a small amount of money to an insurance company, yet reap large compensation benefits during a catastrophic expensive accident, in so doing having gained more money from the insurance company than they paid to it. In such a case, that person made a good “bet” by buying insurance because it helped them out a lot. The insurance company suffered a net loss on that person, so how can its business survive? The answer is by selling insurance to many people, so that the summation of a large number of reliable, but small premiums can be greater than the rare expensive payouts from accidents that a few people have. This is “pooling” together risk and is what enables an insurance business to survive. If the pool is full of high risk people, then the insurer must charge higher premiums on some or all in order to survive. If the pool is full of low risk people, then they can still survive as a business as they charge lower premiums.
All of this makes sense and is fair. A private business has the right to make money and net profit, as they are providing a service for a fee. In a free society, trade and purchases should be done voluntarily, and a seller and buyer should be able to make any contract terms they want in a voluntary trade.
If a person has a history of reckless driving, it makes sense that an auto insurance company charge them a higher premium for protection, or choose to not do business with the person at all, since they are quite likely to get in another accident that the insurer has to pay a lot of money for. This makes sense not just because we think this is the fault of the reckless driver, but also purely on the grounds that the insurance company should be able to evaluate cost risks and freely choose to charge higher for higher risk, regardless of the nature of that risk, be it the fault or not of the insured. For example, an auto insurance company may charge a man more than a woman (even though it’s not the person’s fault that he’s a man) if they have statistics that suggest that men, on average, drive more aggressively. Some would call this discrimination against men, but this form of discrimination is rational and just, and should be legal as a free choice of trade.
Also, what if a person already wrecked their car and then tried to get someone else to pay for it by trying to buy insurance after the fact? This would be a pre-existing condition. Shouldn’t the insurer have the right to not do business with this person? What if the government made a law that an insurer must insure anyone who applies, and must charge everyone the same premium, regardless of risk (driving history), and accept anyone who has preexisting conditions of an already wrecked car? This would either bankrupt the insurance company so that no one could get insurance, or it would force the insurer to charge much higher premiums to all people equally in order to still make a profit due to the high levels of risk and existing cost in the pool. This spreading of cost and risk may help the very high risk people, but it unfairly and heavily burdens the many low risk people, all due to government coercion and interference with the free market.
Think about how this relates to health insurance. Shouldn’t an insurance company have the right to charge higher premiums or not do business with someone who has high health risks or pre-existing conditions. Some complain that a young woman may be charged more for health insurance than a young man simply because she is a woman, and so complain about discrimination. But, because she carries more cost risk than a man because young women have a reasonable chance of becoming pregnant, isn’t it rational and fair for a health insurance company to charge a higher premium, just as an auto insurance company charges more for a man than a woman? On pre-existing conditions, why should an insurance company be responsible for an unhealthy person’s health? Is the insurance company a mommy to a child? No, it is just a business that should be able to provide protection services in exchange for payments in any way that it and a voluntary consumer want. The only rules that an insurance company and a customer should legally be bound to are the terms of the contract (insurance policy) that they voluntarily entered. They are just trying to run a successful business, and they have every right to. Why should they be the government-coerced source of everyone’s well-being?
Finally, the very model and purpose of insurance has gradually been skewed. Instead of using insurance to hedge against an unlikely, unexpected large cost to the consumer, people now use health insurance to cover regular and expected costs, such as routinely taken pharmacy drugs. This is not in the rational financial interest of the consumer as it wastes the consumer’s money, but this model still thrives because the government artificially props it up.