Published by EH.Net (December 2022).
Caley Horan. Insurance Era: Risk, Governance, and the Privatization of Security in Postwar America. Chicago: The University of Chicago Press, 2021. 251 pp. $40 (cloth), ISBN 978-0226784380.
Reviewed for EH.Net by Melissa Thomasson, Department of Economics, Miami University.
In this book Caley Horan explores the marketing, investment, and underwriting practices of the insurance industry in the United States, with a particular focus on events after World War II. She argues that as they sought to prevent nationalization and increased regulation, insurance companies played an important role in propagating free-market policies that subjugated moral and ethical questions of risk-bearing and reinforced institutionalized discrimination.
The book is divided into three parts, each with two chapters. In the first section, entitled “Selling ‘Self-Made’ Security,” the author looks at how insurance marketing changed after the New Deal. The government’s involvement in the economy following the Great Depression created the opportunity to redefine the connection between economic security, the insurance industry, and the government. After the Temporary National Economic Committee (TNEC) accused the industry of predatory selling practices, price fixing, and failing to prevent policies from lapsing, the insurance industry formed the Institute of Life insurance (ILI) to act as a “public relations organization” to avoid increased regulation by the federal government (p. 25). These efforts, which apparently succeeded in preventing regulatory changes, later evolved into a campaign in the 1940s to sell more insurance using national security as justification. As Horan notes, while prewar ads focused on economic security for dependents of policyholders, postwar ads focused on policyholders using insurance to secure individual economic freedom, a “celebration of free enterprise and entrepreneurial action with a thinly veiled critique of public action” (p. 28).
In the first part of the book, Horan effectively demonstrates that the insurance industry sought to avoid increased regulation and potential nationalization by showcasing their value and highlighting their socially responsible actions. In some cases, we see this in the creation and marketing of new products such as Blue Shield in the late 1930s. While hospitals had founded the predecessors to Blue Cross plans in the late 1920s and early 1930s, physicians were slower to develop similar prepayment plans, believing that such plans would limit their ability to price discriminate. But they quickly adopted their own version of Blue Cross, called Blue Shield, after the passage of the Social Security Act in 1935 raised concerns that government could step in and provide nationalized health insurance to fill a perceived gap. The success of Blue Cross and Blue Shield in overcoming adverse selection in the health insurance market also led commercial companies into the market in the 1940s, providing yet another avenue to market “self-made security” to Americans who were worried about communism.
The first chapters of the book are well researched and provide interesting accounts of the development of the insurance industry and insurance advertising during the first half of the 20th century. They detail the data collection efforts insurance companies used to assess risk more accurately (including the famous weight/height tables from Metropolitan Life Insurance Company), offer insight into the origins of driver education (which also involved data collection), and examine how insurance companies used marketing campaigns related to public health and safety to sell their products. However, the chapter also suggests that without insurance company marketing, other forces might have come to dominate, resulting in a more government-based, collectivist approach to economic security. This argument seems to overlook the fact that Americans and non-insurance public interest groups, even before the ILI was founded in 1939, had little appetite for using the government to offset risk, as seen in the repeated failures of attempts to nationalize the health insurance industry during the Progressive Era, the Great Depression, and the 1940s, before commercial health insurance was well established.
Part II of the book, “Investing in Privatization,” offers a fascinating look at insurance involvement in urban renewal and slum-clearing. It describes how with large amounts of assets and regulatory changes in how they could invest, Metropolitan Insurance built the initially all-White Stuyvesant Town and other communities in New York State and addressed charges of racism by creating Riverton for Black homeowners. Horan also examines how the insurance industry’s decisions on where to locate and what to invest in fueled suburban growth. For example, insurance companies poured millions of dollars into suburban shopping malls, which begs the question as to the role of insurance companies in the decline of the urban core, which the author explores in the third part of the book.
The third section of the book discusses redlining by insurance companies. The author discusses the findings of the Hughes Panel (a presidential advisory panel that issued the report “Meeting the Insurance Crisis of Our Cities” in 1968) and presents a convincing argument that, like the Federal Housing Authority, insurance companies used redlining to discriminate based on race. In response to these criticisms, insurance companies argued that their actuarial analysis of risk justified their practices and provided significant funding for a public relations campaign to “reinvest” in urban areas. This part of the book, which also explores gender discrimination, provides a useful context for considering the benefits and drawbacks of experience rating in insurance markets. (Experience rating is the use of factors that could affect risk such as age, health, location, and previous claims and payouts to guide insurance coverage and premiums.)
Economists are aware of how adverse selection combined with community rating can lead to the failure of insurance. The actuarial science behind experience rating is subjective and prone to error, often assigning individuals the risk of their class regardless of their individual behavior, which can reinforce existing social problems such as racism. In addition, as insurance companies compete for subscribers, those who can cherry-pick often have an advantage. For instance, while Blue Cross and Blue Shield initially community-rated their policies, competition with for-profit insurance companies that relied on experience rating eventually forced them to adopt experience rating as well, leading to many people being unable to afford insurance coverage. In this way, Horan’s thought-provoking book asks a good question: what is the role of flawed experience rating in reinforcing discrimination, and how can the problem be fixed?
Melissa Thomasson is Professor of Economics at Miami University in Oxford, Ohio. Her research focuses on the economic history of the US health insurance and healthcare system.
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|Subject(s):||Financial Markets, Financial Institutions, and Monetary History|
Health, including Medicine, Disease, and Pandemics
|Geographic Area(s):||North America|
|Time Period(s):||20th Century: WWII and post-WWII|