Equalisation policy in health is not ideal solution

Shouldn't older drivers share the car insurance burden with the younger generation, just as applies in reverse in health? asks Caroline Madden.

Take five minutes and see if you can work out the answer to the following problem: You are given four cards, each with a number on one side and a letter on the other. The exposed faces read X, Y, 1 and 2. What is the minimum number of cards (and which cards) you would need to turn over to test the rule: "If there is an X on one side there is a 2 on the other"?

This puzzle was used to liven up a business seminar on Consumer Understanding of Risk in Ballsbridge last week. It certainly seemed to set the pulses racing of the actuaries in the audience, but you may be wondering what exactly a probability quiz has got to do with business.

Well, if you managed to figure out the right answer (which can be found at www.business2000.ie/irishtimes), the chances are that you, like those actuaries, have a natural mathematical ability, which is a highly valuable skill in the business world.

Take for example the extremely lucrative "risk-based entertainment" industry (as Paddy Power describes the gambling sector). Bookmakers owe their healthy profits to the teams of odds compilers who right now are calculating the betting odds for this weekend's sporting events.

In the financial sector, stockbrokers, traders, analysts and fund managers have to weigh up the risks of investments against the possible return. And bankers must be able to predict whether a potential borrower is likely to default on a loan.

Then of course there's insurance, a vast industry founded entirely on the idea of risk - from the risk of losing your luggage, your job or your health to the risk of your house being burgled, flooded or burned down.

The logic behind insurance is that lots of people faced with a similar risk pay a premium to an insurance company. All of these premiums are pooled together in a fund, and people who suffer a loss receive compensation from this fund.

Normally the premium charged is based on the risk of an event occurring - so the greater the risk, the higher the premium.

However, as a result of a controversial High Court ruling last week, the private health insurance industry will now operate differently to other areas of the insurance market.

Under a scheme known as "risk equalisation", health insurance provider Bupa is now obliged to subsidise its rival VHI, which has an older, higher-risk client base.

Risk equalisation underpins the Government's policy of community-rating, which aims to spread the cost of health insurance for higher-risk individuals equally among all customers. Bupa says it now expects to have to pay €161 million to VHI over the next three years, but it forecast an accumulated profit of just €64 million for this period.

Naturally VHI is delighted with this turn of events, but Bupa maintains that the scheme is anti-competitive. It has indicated in the past that it may have to exit the Irish market if risk equalisation is enforced.

Now let's contrast this with the car insurance sector. Young male drivers are highly risky bets for insurers. The statistics prove they are far more likely to be involved in a collision, and so they typically pay several times more than older drivers to get insured. For the typical young male driver, paying out €4,000 a year on car insurance is not unheard of.

In the case of private health insurance, the situation is reversed, with older policyholders more likely to make a claim, and are considered higher risk. Under the community-rating scheme, young people who are already being squeezed on their car insurance are expected to carry some of the cost of older people's health insurance.

For risk equalisation - or "inter-generational solidarity" as VHI describes it - to be fair, shouldn't it should work both ways?

Shouldn't older drivers share the car insurance burden with the younger generation?

It doesn't take an actuary to work out that the odds of that happening are fairly slim.