Philadelphia Reflections

A Fair Plan for Fire Insurance (and Health Insurance, too?)

Penn Mutual

The Fair Plan (sixth and Chestnut, Philadelphia) is a fire insurance company with unusual features. Some day, it is to be hoped some scholar will write a book about the highly mixed motives of the people who created it, compared with the unexpected ways it did or did not fulfill original expectations, of both its creators and its enemies. The Fair Plan only issues fire insurance on houses, if other insurance companies have turned that house down as a bad risk. Such risky houses would normally draw higher premiums for fire insurance, but the Fair Plan insures these risky houses at normal rates. Therefore, it loses money, which is made up by the other regular fire insurance companies in the state in proportion to the business they do, obviously thus raising the price of fire insurance for everybody. But in this way, Pennsylvania guarantees that everybody can get fire insurance. Is this a good idea? Might this be a way to give health insurance to all those people who can't get health insurance? Let's talk about the Fair Plan.

We'll set aside discussion of whether the Fair Plan was a product of cynical politicians pandering for votes, or whether it was a noble gesture for fairness and equality for our poorer citizens. It very likely had elements of both motives in it, but that doesn't matter any more. It's a form of hidden taxation, of course, and it has the result of making Fire Insurance seem more expensive in Pennsylvania than in other places that do their social work with real taxes. Go too far with that, and people will end up buying their insurance in Bermuda instead of boarded-up former fire insurance companies in Pennsylvania.

As the story is now told, the regular insurance companies had a choice of taking the "substandard" applicants in turn ("Assigned Risk") or creating a new company (Joint Underwriting Association). They decided they preferred the JUA. So a company was formed which specializes in nothing but bad risks, including a few arsonists and other unmentionables, but mostly poor people in bad neighborhoods. If we are ever thinking about following the Fair Plan model in health insurance, it would run the risk of being accused of creating a two-class healthcare system. But no one seems to bring up that rhetoric about fire insurance, primarily because there is comparatively little intrusion of politics in the matter, This system is given orders to spread the extra cost of universal fire insurance out to the policy holders of all fire insurance, and it does it very efficiently, without extending its mandate into setting firefighter wages, running fire departments or repainting scorched woodwork. The fundamental decision was whether to spend Society's money this way. Once that decision is taken, the task is to do it efficiently. Notice, this is not compulsory fire insurance; it is compulsory availability of fire insurance.

After the Fair Plan had been running for ten or so years, a funny thing emerged. There were years when the Fair Plan made a profit! The fire insurance industry had absorbed the Fair Plan into their scheme of things, and felt free to increase the number of applicants they rejected, during years when money was tight or business was bad. If you had compulsory availability of fire insurance, the provision of a company which could not refuse an application made it possible for every other company to refuse when it pleased. When the economy encouraged rejection, a better class of applicant came to the Fair Plan, which made the plan more profitable. When economic conditions reversed, this reversed, and the Fair Plan again lost money. For this reason, the insurance industry is very anxious to prevent the Fair Plan from becoming political, or getting tangled up in worthy but extraneous ventures. And that's probably a good model, too, if we are considering adopting a similar system for the health insurance world: stick to your mission.

Since this simple, tested idea never seems to get into the discussion phase of present agonizing over health insurance for the uninsured, it's one clear sign that such discussions at present are not terribly serious.

Originally published: Friday, June 23, 2006; most-recently modified: Friday, April 12, 2019