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Risky Business: Why Insurance Markets Fail and What to Do About It
An engaging and accessible examination of what ails insurance markets—and what to do about it—by three leading economists
“The authors . . . do a masterful job of explaining the intractable complexities created by this socially vital activity.”—Martin Wolf, Financial Times , “Best Books of 2022: Economics”
Why is dental insurance so crummy? Why is pet insurance so expensive? Why does your auto insurer ask for your credit score? The answer to these questions lies in understanding how insurance works. Unlike the market for other goods and services—for instance, a grocer who doesn’t care who buys the store’s broccoli or carrots—insurance providers are more careful in choosing their customers, because some are more expensive than others.
Unraveling the mysteries of insurance markets, Liran Einav, Amy Finkelstein, and Ray Fisman explore such issues as why insurers want to know so much about us and whether we should let them obtain this information; why insurance entrepreneurs often fail (and some tricks that may help them succeed); and whether we’d be better off with government-mandated health insurance instead of letting businesses, customers, and markets decide who gets coverage and at what price. With insurance at the center of divisive debates about privacy, equity, and the appropriate role of government, this book offers clear explanations for some of the critical business and policy issues you’ve often wondered about, as well as for others you haven’t yet considered.
“The authors . . . do a masterful job of explaining the intractable complexities created by this socially vital activity.”—Martin Wolf, Financial Times , “Best Books of 2022: Economics”
Why is dental insurance so crummy? Why is pet insurance so expensive? Why does your auto insurer ask for your credit score? The answer to these questions lies in understanding how insurance works. Unlike the market for other goods and services—for instance, a grocer who doesn’t care who buys the store’s broccoli or carrots—insurance providers are more careful in choosing their customers, because some are more expensive than others.
Unraveling the mysteries of insurance markets, Liran Einav, Amy Finkelstein, and Ray Fisman explore such issues as why insurers want to know so much about us and whether we should let them obtain this information; why insurance entrepreneurs often fail (and some tricks that may help them succeed); and whether we’d be better off with government-mandated health insurance instead of letting businesses, customers, and markets decide who gets coverage and at what price. With insurance at the center of divisive debates about privacy, equity, and the appropriate role of government, this book offers clear explanations for some of the critical business and policy issues you’ve often wondered about, as well as for others you haven’t yet considered.
280 pages, Hardcover
Published January 31, 2023
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Displaying 1 - 30 of 31 reviews
March 28, 2023
This is the most awful audiobook ever made. Besides that, it's a pretty good book.
Non-fiction audiobooks can work. Economics audiobooks can work. They are trickier than you'd expect, and require the most competent of narrators, but they can be really good. This is objectively the worst one for a very simple reason. The narrator reads the footnotes. It is unbearable. A good point will be made, or an insightful argument put forward, and it is then jarringly followed by author, title, year and publisher. The poor narrator even reads the "http://". Whomever thought this was a good idea, be it the producer, author or narrator themselves, deserves the very best. Making an audiobook is tough. As annoying as it is to listen too, this is clearly a mistake made somewhere along the line. But it is very annoying.
Onto the book, this is excellent stuff. Liran Einav, Amy Finkelstein, Ray Fisman have collaborated to write a very interesting examination of insurance markets, in particular, selection markets. They set out their stall in the first few chapters, dig into a few good problems in the middle and critique some of the lazier solutions to these issues in the latter part. It's engaging, and rather funny. The book is very concentrated on American markets however, and therefore became a little harder to follow when it became specifically about American healthcare as it assumes a basic knowledge of how that system operates from the out.
Einav, Finkelstein and Fisman's best accomplishment is to argue sympathy for the insurance companies themselves. They turn them from avaricious beasts into practical market players. This is a nuanced take, requiring half the book to even get warmed up. But in making this heel turn, the authors successfully begin to make solutions to selection market problems seem more achievable. Unfortunately it requires a second listen for me to pick up the detail, but I liked the timbre of the argument enough to pick up the book. I will never listen to this audiobook again.
Because no matter how novel the arguments, or elegant the humour, this audiobook is objectively the worst. I'm not angry, but I am without forgiveness.
Non-fiction audiobooks can work. Economics audiobooks can work. They are trickier than you'd expect, and require the most competent of narrators, but they can be really good. This is objectively the worst one for a very simple reason. The narrator reads the footnotes. It is unbearable. A good point will be made, or an insightful argument put forward, and it is then jarringly followed by author, title, year and publisher. The poor narrator even reads the "http://". Whomever thought this was a good idea, be it the producer, author or narrator themselves, deserves the very best. Making an audiobook is tough. As annoying as it is to listen too, this is clearly a mistake made somewhere along the line. But it is very annoying.
Onto the book, this is excellent stuff. Liran Einav, Amy Finkelstein, Ray Fisman have collaborated to write a very interesting examination of insurance markets, in particular, selection markets. They set out their stall in the first few chapters, dig into a few good problems in the middle and critique some of the lazier solutions to these issues in the latter part. It's engaging, and rather funny. The book is very concentrated on American markets however, and therefore became a little harder to follow when it became specifically about American healthcare as it assumes a basic knowledge of how that system operates from the out.
Einav, Finkelstein and Fisman's best accomplishment is to argue sympathy for the insurance companies themselves. They turn them from avaricious beasts into practical market players. This is a nuanced take, requiring half the book to even get warmed up. But in making this heel turn, the authors successfully begin to make solutions to selection market problems seem more achievable. Unfortunately it requires a second listen for me to pick up the detail, but I liked the timbre of the argument enough to pick up the book. I will never listen to this audiobook again.
Because no matter how novel the arguments, or elegant the humour, this audiobook is objectively the worst. I'm not angry, but I am without forgiveness.
October 29, 2023
Likely the most naïve, poorly-researched and sloppily-written publication yet from the once-respectable Yale Press. The contortions of logic these economists execute to “prove” their lazy hypothesis left me breathless with disbelief. How the actual #@^! did this get published, I just can’t fathom.
They actually hit, here and there, on far more plausible answers to their straw man queries, set up to illustrate the hypothesis-as-fiat that ‘selection’ is the key variable to the success or failure of a market for any given insurance product. E.g., Wondering why pet insurance is so expensive, the authors joke that, surely, insurers gouging their customers would never be the answer, right?
And why no data?? Some data, any data, would provide some answers perhaps? But of course, data would show that there is no there there. Like, data that show pet insurance loss ratios average less than 20%, perhaps would suggest that in fact insurers do routinely gouge their customers… but then there would be no book. No utterly superfluous, resume-padding book by three more superfluous hack professors of economics…
They actually hit, here and there, on far more plausible answers to their straw man queries, set up to illustrate the hypothesis-as-fiat that ‘selection’ is the key variable to the success or failure of a market for any given insurance product. E.g., Wondering why pet insurance is so expensive, the authors joke that, surely, insurers gouging their customers would never be the answer, right?
And why no data?? Some data, any data, would provide some answers perhaps? But of course, data would show that there is no there there. Like, data that show pet insurance loss ratios average less than 20%, perhaps would suggest that in fact insurers do routinely gouge their customers… but then there would be no book. No utterly superfluous, resume-padding book by three more superfluous hack professors of economics…
March 5, 2023
This ain't gone girl (i may have said that about the book about CPP?). And the authors acknowledge that, and they've done their best to make it snappy. But i found this book seemed a little bit disjointed. There were a lot of case studies, but it seemed to lack a coherent narrative throughline to tie the concepts together. I think structuring around 5 basic principles would have made it clearer for the intended audience, which is, i assume, me. Haha.
April 8, 2023
This book only made me angry. I get why insurance companies get what they do. It’s to make money. That’s why they shouldn’t be in the business of health care.
January 30, 2025
You might assume a book about insurance would be dull regardless of what the jacket reviews say, and if so you'd be smarter than me
January 2, 2025
I'll expand on these later, but four bulletpoints for now:
- Selection effects and their results are quite obvious if you just think about them for a bit. Book could be shorter. Nonetheless, I hadn't really thought about them before reading this.
- Discussion of insurance and annuity pricing ethics was interesting. Not something I'd thought about before.
- The concept of doom loops and its corollaries are very interesting.
- At every turn, the authors say "yeahhhh insurance is not the most interesting thing to most people, but let me tell you...". I wish they'd stop doing that. Obviously the "most people" who don't find insurance interesting are not reading this book, so nothing is accomplished by saying that.
- Selection effects and their results are quite obvious if you just think about them for a bit. Book could be shorter. Nonetheless, I hadn't really thought about them before reading this.
- Discussion of insurance and annuity pricing ethics was interesting. Not something I'd thought about before.
- The concept of doom loops and its corollaries are very interesting.
- At every turn, the authors say "yeahhhh insurance is not the most interesting thing to most people, but let me tell you...". I wish they'd stop doing that. Obviously the "most people" who don't find insurance interesting are not reading this book, so nothing is accomplished by saying that.
August 26, 2023
If solely compared to books about insurance, it would be a 5/5. But you can only make this topic so interesting. Nonetheless, the authors accept this challenge, telling the story of risk insurance in what feels like an extended Freakonomics episode (yes they also went on Dubner’s show). There’s humor, triumph, failure, and the slightest bit of math.
This book explains the value of insurance (peace of mind and security against financial ruin) as well as how insurance markets break down. They narrow the issue to the problem of selection, that is when customers purchase or forgo insurance based on their inside knowledge of their likelihood to make a claim. This causes premium prices to increase or insurance markets to unravel altogether.
The authors rightly emphasize the importance of adverse selection but don’t explicitly name two other key concepts: information asymmetry and moral hazard. These three factors together lead to the complicated relationship between insurers and the insured.
The insurance business is frequently the scapegoat of the health care industry, so this book is a good reminder of the challenges it faces when trying to fulfill its basic function. I’m someone who questions why we shouldn’t make health insurance more like utility companies than for-profit corporations, but I don’t believe insurance executives are any more greedy than doctors, hospitals, and patients. We all try to make and save money where we can.
I wouldn’t think the audience is large for a book like this, but I guess it got my attention.
This book explains the value of insurance (peace of mind and security against financial ruin) as well as how insurance markets break down. They narrow the issue to the problem of selection, that is when customers purchase or forgo insurance based on their inside knowledge of their likelihood to make a claim. This causes premium prices to increase or insurance markets to unravel altogether.
The authors rightly emphasize the importance of adverse selection but don’t explicitly name two other key concepts: information asymmetry and moral hazard. These three factors together lead to the complicated relationship between insurers and the insured.
The insurance business is frequently the scapegoat of the health care industry, so this book is a good reminder of the challenges it faces when trying to fulfill its basic function. I’m someone who questions why we shouldn’t make health insurance more like utility companies than for-profit corporations, but I don’t believe insurance executives are any more greedy than doctors, hospitals, and patients. We all try to make and save money where we can.
I wouldn’t think the audience is large for a book like this, but I guess it got my attention.
February 4, 2023
A quick and lively nontechnical overview of adverse selection in insurance markets, explaining the theory and the evidence, with plenty of anecdotes about particular markets affected by the issue along the way.
The focus is tight, concentrating on recent economics literature trying to convincingly demonstrate the presence of and measure adverse selection, to which the authors are major contributors, and then drawing some policy lessons, particularly for US healthcare policy, the ACA and Medicare advantage. Adverse selection more broadly as a phenomenon in, e.g., financial markets, is only briefly introduced in the last chapter, and moral hazard is barely discussed at all even in terms of its interaction with adverse selection, which is odd given that the authors wrote the foremost paper on the topic. As is, it does a good job explaining and convincing the reader that adverse selection is not just an academic curiosity, and at least deserves a place supplementing that particular intermediate microeconomics lecture.
The focus is tight, concentrating on recent economics literature trying to convincingly demonstrate the presence of and measure adverse selection, to which the authors are major contributors, and then drawing some policy lessons, particularly for US healthcare policy, the ACA and Medicare advantage. Adverse selection more broadly as a phenomenon in, e.g., financial markets, is only briefly introduced in the last chapter, and moral hazard is barely discussed at all even in terms of its interaction with adverse selection, which is odd given that the authors wrote the foremost paper on the topic. As is, it does a good job explaining and convincing the reader that adverse selection is not just an academic curiosity, and at least deserves a place supplementing that particular intermediate microeconomics lecture.
September 5, 2023
Excellent writing, but intended for lay people and public. Would be a nice "introductory textbook" for a health insurance class.
June 8, 2023
Insurance is a tedious business and the big companies behind most insurance are predatory capitalist bureaucracies that are impossible to like, but the mathematical and economic reasoning that are the basis for insurance markets are fascinating, at least for a geek like me. This book explores why it is hard and sometimes impossible to properly price insurance because the people who buy insurance always seem to be at greater risk of suffering the kinds of losses that the insurance covers than the average people in the target market. In theory insurance companies should be able to plan around this risk, by gathering enough information to evaluate the risk of each potential customer before binding a policy. And if legal requirements around acceptable criteria for granting or denying coverage require insurers to take on riskier business, they ought to be able to plan around that by just adjusting up the premiums to take the greater risk into account. But somehow, according to this book, the clever buyers of insurance always seem to be one step ahead of the insurance companies so that in practice a pure actuarial analysis sets the premiums too low and the insurance companies don't have enough information about why this happens to be able to make an accurate adjustment in their premiums. Your first reaction is probably the same as mine - too bad for the insurance companies; if the policy holders are outsmarting them, then the good guys are winning. But it's not as simple as that. We all lose in the long run if the market isn't able to price the risk properly. And according to Mr. Einav there is no sure fix to this problem. It certainly sounds like exactly the kind of problem that can be solved with big data and AI, which should be able to get around the problem of knowing the right questions to ask on an insurance application and relying on the not completely accurate answers that prospective policyholders often provide. So I'd be interested to know if most of the issues discussed here are still issues ten years from now.
In addition to the general discussion, the book includes an analysis of government regulated and subsidized insurance markets. Here we have issues of fairness that don't have easy answers, though the best answer to a lot of these problems often seems to be mandatory coverage for everyone with no exceptions at a uniform price. There are a lot of issues here too, and there are certainly a lot of special cases and differing ideas about what is fair, but simplicity and uniformity often seem to be the best defense against the cat and mouse game among regulators, insurance companies and policyholders.
In addition to the general discussion, the book includes an analysis of government regulated and subsidized insurance markets. Here we have issues of fairness that don't have easy answers, though the best answer to a lot of these problems often seems to be mandatory coverage for everyone with no exceptions at a uniform price. There are a lot of issues here too, and there are certainly a lot of special cases and differing ideas about what is fair, but simplicity and uniformity often seem to be the best defense against the cat and mouse game among regulators, insurance companies and policyholders.
October 18, 2023
Risky Business: Why Insurance Markets Fail and What to Do About It is a ground-level primer of choice economics and suboptimal market design. Herein, economists authors Liran Einav (Stanford), Amy Finklestein (MIT), and Ray Fisman (Boston University) have written an accessible introduction to how the “problem of selection” (i.e., consumers concealing and capitalizing on private information) affects many market activities, from lifetime airline passes, bottomless buffets, different forms of insurance, and annuities. In each of these markets, buyers who participated had the most to gain. Sellers, constrained by their “asymmetric information” of buyer characteristics and propensities, rarely came out ahead. The authors point to the health insurance market as a case example of how choose enables opportunities for selection: sicker people are more likely than healthier people to sign up for coverage, thus contributing to market dysfunction (commonly referred to as a “death spiral”). The authors discuss multiple solutions for selection problems, including the use of waiting periods, federal subsidies, and purchase requirements (individual mandate) that incentivize broader participation and healthier market dynamics. This book is highly recommended for a general audience that seeks to understand both how markets are often bedeviled by the two-sided nature of choice, as well as how creative solutions can mitigate instances where informational frictions impede optimal market functionality.
April 19, 2023
If I had to grade this book on readability, I would have given it high marks. The authors break a complex subject down into very readable terms. It's true though that the books dwells on the concept of selection to a fault. They make the point over and over again. More troubling is the fact that a technical error crept into the text in that the generic name of Zetia is stated as simvastatin. In fact, the generic name of Zetia is ezetimibe. Simvastatin is the generic name of Zocor. That raises the question as to what other errors there are in the text. But the most disturbing aspect of this book is the gross oversimplification of Medicare Part D, prescription drug coverage, to the point where it is misleading or downright inaccurate. There is no mention of formularies, pharmacy benefit managers, or what must be covered under Part D by law. A read of the section on Part D would lead one to believe that it is governed by the market only. In fact, Medicare Part D does not lend itself to brief analysis. It could itself be the subject of an entire book. You will enjoy reading the book for its light treatment of a complex subject. You must fact check before drawing conclusions.
May 5, 2025
The first 5 chapters should have been 1/3 of a chapter. The authors repeat an idea in too many examples without adding any new perspective in each. The last 3 chapters, however, are thought provoking. With 'selection' problem in the background, the stylized example which explains why subsidizing insurance for healthy is beneficial for the unhealthy (and hence most needy of insurance) is mind-blowing. They also clearly explain why some form of regulation raises premiums (all data-backed, of course).
Of course, this book only covers the insurance aspect of health care in the US, not other aspects of it - regulation, prescription drugs etc that make it expensive. Overall, the book made me fascinated with the world of insurance and its core problems. It won't show what's wrong with US healthcare system, it just deep dives into insurance part of it.
Of course, this book only covers the insurance aspect of health care in the US, not other aspects of it - regulation, prescription drugs etc that make it expensive. Overall, the book made me fascinated with the world of insurance and its core problems. It won't show what's wrong with US healthcare system, it just deep dives into insurance part of it.
January 15, 2024
This was an interesting look at the insurance market, and why it is the way it is. And how it's gotten to be so bad, and such a headache. As a healthcare worker who is reimbursed by insurance and finds their rules and regulations frustrating beyond belief and truly limit how I provide my services - this piqued my interest. I'm probably just removing a star because by nature I am not an economics person and at times I found this hard to understand. Also was wondering where more data was. But I found this interesting overall and appreciated the explanations they gave for basic aspects of the insurance market. SMH...
October 27, 2023
Risky Business is one of the most enjoyable books I have read in a long time. This book explains in a fun and engaging way how the problem of asymmetric information creates selection problems in insurance markets and many other as well. I would recommend this book to anyone interested why insurance markets (health, life, dental, pet, etc.) don't work as they should or are in fact non-existent (divorce insurance, etc.) This was really a joy to read.
November 1, 2023
Tldr: insurance is a big casino. The selection problem has the insurers and the insured fighting to save money. It also makes you sympathize with policy makers and acknowledge that it is a complex problem to solve where the riskier businesses and most vulnerable will be screened out of insurance most of the time. It makes you think what is insurable and what is not. It is written in a easy to understand Freakonomics style that changes the way you think about certain life problems.
May 8, 2023
A fun read on various aspects of insurance and how to understand policy and regulatory questions facing policymakers and businesses. As an insurance broker myself, I found this a good read that exposed me to other decisions and questions facing players in the industry besides my little corner of it.
August 29, 2023
It's a good book that tries to explain the issues that pop up in insurance markets that are due to information asymmetry and adverse selection. I docked a star only because I think it would have benefitted from another pass for readability -- some of the phrasing and writing doesn't flow as well as it could have.
May 6, 2023
Who would’ve thought that insurance is actually pretty interesting? Book was a bit repetitive at times, but I learned a ton about insurance and—even better—selection markets in general. That’s something I certainly didn’t have any intuition for before reading this book.
June 6, 2024
This is a well written explanation of the phenomenon of selection in insurance markets. The authors include many interesting historical examples of how selection and information disparities bend and twist the market for insurance.
November 30, 2024
1. why insurance markets fail and what to do about it
2. it all comes down to Selection decision -- both of the part of the customer and the insurance company
3. each side either has private information or is trying to get information to make the best decision on weather to buy/sell insurance
2. it all comes down to Selection decision -- both of the part of the customer and the insurance company
3. each side either has private information or is trying to get information to make the best decision on weather to buy/sell insurance
March 1, 2025
The general points in this book are interesting, but let down somewhat by a US bias (e.g. that health insurance problems can't be solved because of selection, even though sensible countries have universal state-provided cover funded by taxation).
June 13, 2025
Hammered home the point of selection well, but felt repetitive. Could have discussed more mathematical details, further examples (eg can private information really survive in a big data world?) & gotten a bit further into the weeds.
February 23, 2023
Great primer on insurance markets and the importance of selection.
April 30, 2023
Repetitive but informative
July 10, 2023
Breezy, well written, but perhaps too focused on selection issues
August 5, 2023
Clear, concise and simple overview of insurance markets. A nice high level overview of the US health insurance market targeting the average reader rather than someone from the industry.
November 29, 2023
Easily the best book on insurance I have ever read. Hilarious and witty. Can’t unsee all the adverse selection everywhere.
May 1, 2025
A minimally boring introduction to the “selection problem”. The book uses many tangible examples, and touches on other related topics like moral hazard, as well as where selection problems show up outside insurance (in more places than you would think!)
January 1, 2024
Decently accessible in its description of insurance with some quite entertaining anecdotes - I especially enjoyed the image of continental investors back in the day trying to keep old men in Scotland alive and kicking to benefit from the annuities!
But on the other hand, it didn't flow as well as some of these type of books and at some points it felt a bit like it had lost the thread of what it was trying to say.
But on the other hand, it didn't flow as well as some of these type of books and at some points it felt a bit like it had lost the thread of what it was trying to say.
Displaying 1 - 30 of 31 reviews