Bryan Caplan  

Insurance, Reputation, and Kristallnacht

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Masonomics Watch... Insurance, Reputation, and Car...
In 1938, Jewish businesses and synagogues through Germany were burned and looted in a massive pogrom.  Historians call the incident Kristallnacht.  The Nazis naturally blamed the Jews.  So the Nazis were horrified when they realized that Aryan-owned insurance companies were liable for the damages!

The obvious solution for the Nazis was to let the insurance companies weasel out of their contracts.  But contrary to what critics of private health insurance would have you think, insurance companies aggressively lobbied against this solution.  Why?  Because they greatly valued their reputation.  As the Holocaust History Project explains:
Insurance was an international business and insurance companies were worried about their loss of reputation if they did not keep their contracts to indemnify the losses.  In a meeting after Kristallnacht, Göring compromised with the nervous insurance industry by allowing them to pay out the damages, even to Jews. To offset those losses, Göring then imposed a huge fine on the Jewish communities in order to offset the losses of the insurance companies. Thus, the Jews themselves ended up paying for the damages in an indirect way.
"The Nazis made me do it."  What better excuse is there for an insurance company to renege?  But the German insurers refused to take the easy way out - even though most of them were probably anti-Semites themselves.  Here's the key passage from official Nazi documents (Hilgard was a leading figure in German insurance industry; as far as I can tell, all of the other people in the transcript are Nazi officials):

Hilgard: ...We'd like to make it our point, Mr. General Field Marshall, that we shall not be hindered in fulfilling the obligations for which our contracts call.

Goering: But I have to. That is important for me.

Hilgard: If I may give reasons for this request, I'd like to say that it simply has to do with the fact that we carry out, to a large extent, quite a number of international transactions. We have a very good international basis for our business transactions, and in the interest of the equilibrium of the Foreign exchange in Germany, we have to make sure that the confidence in the German insurance shall not be ruined. If we now refuse to honor clearcut obligations, imposed upon us through lawful contract, it would be a black spot on the shield of honor of the German insurance.

Goering: It wouldn't the minute I issue a decree-a law sanctioned by the State.

Hilgard: I was leading up to that.

Heydrich: The insurance may be granted, but as soon as it is to be paid, it'll be confiscated. That way we'll have saved face.

Hilgard: I am inclined to agree with what General Heydrich has just said. First of all, use the mechanism of the insurance company to check on the damage, to regulate it and even pay, but give the insurance company the chance to...

Goering: One moment! You'll have to pay in any case because it is the Germans who suffered the damage. But there'll be a lawful order forbidding you to make any direct payments to the Jews. You shall also have to make payment for the damage the Jews have suffered, but not to the Jews, but to the Minister of Finance.

(Hilgard: Aha!)

What he does with the money is his business.

Schmer: Your Excellency, I should like to make a proposal. A certain rate should be fixed, say 15% or maybe a little higher, of all the registered wealth, I understand one billion is to be confiscated so that all Jews shall pay equally, and from the money raised this way, the insurance companies shall be refunded.

Goering: No. I don't even dream of refunding the insurance companies the money. The companies are liable. No, the money belongs to the State. That's quite clear. That would indeed be a present for the insurance companies... You'll fulfill your obligations, you may count on that.

The German insurance companies hardly come out looking like heroes.  As long as they preserved their reputation, they couldn't care less about the fate of their Jewish customers.  But this example still makes my point well: If even insurers in Nazi Germany insisted on living up to the letter of their Kristallnacht obligations, insurance companies' reputational motive must be strong indeed.


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COMMENTS (31 to date)
Matt C writes:

I think in some cases insurance companies are quite protective of their reputation.

In the case of health insurance, I'm not so sure. The market is pretty far from free, and the overall reputation of the industry is already terrible.

Here was an article on rescission that I thought was persuasive. Would love to hear your thoughts on it if you find it interesting.

http://tauntermedia.com/2009/07/28/unconscionable-math/

We buy our health insurance as a family (not employer provided) and I worry about this happening to us if we ever need to file a big claim. I don't doubt that they can find some error or omission on our original application if they go over it with a fine tooth comb.

The fact that we're using Blue Cross does make me feel a little less worried. Which sort of supports your original point.

matt writes:

I would like to point out that health insurance companies don't operate internationally, additionally they typically sell to a captured audience, I just don't see this incentive working.

Floccina writes:

If people see health insurance companies as being so bad, why do they buy anything but very high deductible insurance. The lower the deductible the more they have to deal with the insurer.

Damien writes:

@matt

The point here is that insurance companies are typically concerned about their reputation. Whether they operate internationally or not is irrelevant. It had relevance in 1938 Germany because the foreign understanding of the Kristallnacht might have differed from the German one. Many Germans (with the help of propaganda) would have seen it as a patriotic gesture by insurance companies. Foreigners would have seen it as a sign that German companies cheated their customers.

Dezakin writes:

It might work for property insurance, but health insurance just doesn't apply. Most people dont buy health insurance, often because the cost isn't worth the perceived value. They get it as an employment benifit. As is insurance companies suffer poor reputations allready and they do little to correct it. They dont have to.

Dr. T writes:

Reputation does matter. Even if most people get health insurance through their employers, they almost always have multiple choices. And, those choices come up for renewal annually. An insurer with a bad reputation will not get renewals.

Marko writes:

"As is insurance companies suffer poor reputations allready and they do little to correct it. They dont have to."

and...

"The market is pretty far from free, and the overall reputation of the industry is already terrible."

---------------

Go to a company with over 200 employees and chat up a small sample on the subject of their insurance policy, the company providing it, the quality of coverage, and so on. In some states, such as CA, there may even be a variety of possible coverage options from a variety of different companies. This is how it is at my place of employment.

People have pretty spirited opinions on the quality and most of all service of the different companies. Shockingly, most of the consumer's goodwill is directed towards the one HMO option; "They do everything under one roof," "Don't have to track down doctors all over the place," "They took care of such-and-such without a question" - these are all commonly heard comments.

Les writes:

One example is not sufficient to support a principle. A ready counter-example is the Swiss life insurance companies who refused to pay out awards to heirs of insured Holocaust victims, but demanded to see death certificates - despite the fact that the Nazis did not issue death certificates when they murdered millions of Holocaust victims.

A parallel case is the Swiss banks who refused to pay out cash deposits to heirs of Holocaust victim depositors, but also demanded to see death certificates. Years later, they were forced by litigation to make some - but not all - payments.

Artturi Björk writes:

Les: Your example in not a counter-example. That businesses make mistakes does not mean that they have an incentive to make mistakes. (And thus would be prone to make mistakes.)

If this Swiss companies actually did wrong in the eyes od the public then they would see their market share plummet. If on the other hand customers saw little wrong in the way they treated the relatives claims then they would retain their share of the market.

However you slice it, if people care about their insurance and if they perceive the past actions of a company being a measure of their future actions, then reputation matters and companies have an incentive to treat customers right.

Les writes:

Thank you Artturi for correcting my error. Of course the Swiss Insurance Companies and Banks had every right to rob Holocaust victims and their heirs. Who cares about right or wrong?

HH writes:

Les: how you took that away from what Artturi was saying is beyond me.

Peter McCluskey writes:

A key phrase is "clearcut obligations". Does health insurance create clearcut obligations?

It appears that it is much more common for life insurers to do a blood test before writing a policy than for health insurers to do so. I'd say this is a clear symptom that competition has forced life insurers to be more cautious about rescinding policies than is the case for health insurers.

Ezra writes:

So where's the evidence of your hypothesis that American Health Insurance companies follow the pattern of Nazi era business insurance? All the evidence I've seen shows that most insurance companies weigh their desire to pad their bottom line by limiting payments to sick people over their lesser need to maintain a good reputation.

Patrick writes:

I tend to think this example is a bad analog. If we were talking about another international event like 9/11, this would make sense as an explanation for why a Saudi insurance company would have a strong incentive to pay their WTC disaster insurance despite whatever inclinations they might have.

But in the health insurance industry...
1. The claimants are sick people who don't have the resources to pay their bills, much less do a publicity tour.
2. Each individual illness is not really newsworthy, it is commonplace and periodic.
3. The insurance companies have gigantic marketing, legal, and lobbying budgets, to deal with any individual cases that become problematic.

The only way your analogy applies is if the publicity scope and scale of the claims is larger than the company's budget to suppress it.

Scot writes:

@Bryan,

What are we supposed to make of your argument?

Are you really trying to say that, since modern America is better than Nazi Germany, OF COURSE American health insurance companies will behave at least as well as German property insurance companies behaved in the wake of Kristallnacht?

Here is where everything breaks down for your argument: as shown by the quoted text above, the insurance companies of Nazi Germany were concerned not about their domestic Jewish customers, they were worried about losing the business of their international customers.

So, what's the likelihood that American health insurance companies have any international customers (other than those who live and work in the U.S.)? For example, how many citizens of the UK, France, Denmark and Japan, who live and work in those countries, will drop their U.S. insurance coverage if the American health insurance companies don't live up to their obligations? I suppose you could say "all of them," but since we're talking about a null set, that would be a bit disingenuous.

The fact is that U.S. health insurance companies only insure Americans, and each and every state is served by one or two health insurance companies that behave exactly the same. Since their customers really have no choice but to accept what they get (or don't get), the health insurance companies don't have to worry about their reputations. Reputation only matters in the face of vigorous competition, which does not exist in health insurance.

You also conveniently forget the history of U.S. insurance property companies in the wake of disasters. Go back and review episodes like Hurricane Katrina and California's Loma Prieta earthquake and consider revising your position.

Brian writes:

You must have a good reputation first for this analogy to hold any merit. How can an insurance company worry about its reputation if it has none to begin with? We already have countless examples of insurance companies doing awful things to people that have damaged their reputation and as such, continue to do so.

george writes:

"reputation" is a meaningless concept in
the age of insurance-provider consolidation.

Jim writes:

I have to agree with many of the other comments here, you can't point at something from 1940's germany and apply it to 21st century United States without alot of evidence to back up your claim. Evidence which you have not provided.

HH writes:

@Scot: "Here is where everything breaks down for your argument: as shown by the quoted text above, the insurance companies of Nazi Germany were concerned not about their domestic Jewish customers, they were worried about losing the business of their international customers."

How does this mean that anything breaks down? The whole point is that German insurance officials, who are likely anti-Semitic and would just love to not pay out to Jewish customers, not only insured Jewish businesses but also bucked state orders not to pay them. By analogy, your insurance doesn't have to care about YOU when it doesn't want to pay on your claim - but there are hundreds and thousands of others whose business it wants to obtain or retain, and declining your legitimate claim would obviously hurt their reputation and impair their ability to get that new business/retain old business.

@Brian: "You must have a good reputation first for this analogy to hold any merit. How can an insurance company worry about its reputation if it has none to begin with?"

This needs some explanation. Why would you take your insurance business to someone who has no reputation, or worse, a bad reputation? Why would employers pick insurers who will put up a fuss? You're suggesting a serious market failure here: that some people for whatever reason get insurance from companies with deservedly poor reputations. Either people are forced into doing so or they're so dumb they can't tell the difference [while being able to tell the difference among all other reputable businesses]. either way, you need some way to explain why a company with a bad reputation would be getting business. [If it's a low price commensurate with the quality, that's a feature, not a bug.]

Michael Sutherland writes:

Uh, Floccina...people buy insurance with higher deductibles because the premiums are lower. If you spend more in additional premiums than you think you're likely to in regular medical expenses, why pay for the lower deductible? It's your basic cost/benefit analysis, at the personal level.

As a person who's had his insurance denied, I can assure you that reputation is not much of a motivating factor for these companies. Caplan's a little bit off in his comparison.

NadavT writes:

This is a lovely little story, but as Krugman points out, it's about as relevant to today's insurance market as a story about an alternate universe. There is plenty of evidence that insurance companies go through patient records in order to find an excuse to deny coverage once people require expensive procedures. CEOs of insurance companies admitted to such practices in front of Congress and refused to agree to stop them. If these companies care about their reputations as much as you claim, why would they so brazenly admit to practicing rescission?

If an insurer's reputation is such a precious commodity, it shouldn't be difficult to find a contemporary example of a health care company denying profits in order to preserve its reputation, or conversely, a company that suffered losses as a result of a negative reputation. Why bother with unrelated historical anecdotes?

Jay writes:

It's not clear to me that any concern health insurance companies might have for their reputation could have a significant positive impact on the "quality of the product" from the perspective of the insured:

(1) health insurance is an extremely concentrated market, limiting consumer ability to choose based upon reputation

(2) there are no reasonable sources of information for consumers to use. How can you find out how generous each company is for chemotherapy regimens, rehabilitation, or rescission?

(3) from the perspective of insurers, their clients are employers, not employees. Their reputation for quality of coverage or the politeness of the claims department doesn't matter as much as their reputation for low costs and administrative services.

Dick Hertz writes:

That's why they call them the good old days. It was a long time ago, people remember things as better than they really were (per Les), and recall them with a romanticized glow.
Health insurers are using their monopsony power to control markets, control regulators, and crush dissent. Did Cigna decide to cover the Sarkissians before or after the child died of her ailment? Have they suffered any loss to their reputation for breaking their contract and dragging out their process until the child died of a brain tumor for want of approval? Not that I've seen.
Just more right wing propaganda glorifying the Nazi era.

Eric writes:

Very interesting story, but I'm not sure how relevant it is. The basic difference is that the insurers here are responding to a large event, the sort of thing where people know what is going on and are watching. The sort of thing that risks their reputation. With the exception of epidemics, (which are a vast, vast minority of health insurance claims), the events (illness) are personal, known only to the friends and family of those involved. It doesn't make the news that my dad has cancer, and it doesn't make the news that his health insurance is trying to deny his treatment because this round comes in pill form, and so unlike invasive surgeries or chemotherapy, is considered a perscription rather than cancer treatment. The obvious fact that this is treating his cancer, and he is well under the finnancial limits for that, will never make the news, and so never really threaten the companies reputation.

Further, there is another important distinction between this kind of personal trauma and the sort used as an example above. When the event makes the news, an important part of that news will be the companies involved. One reads the news looking for information. However, when personal events occur, and friends and family are told, it is the suffering of the loved one, not the knowledge that a particular insurance company is awful, that people pay attention to. Nevermind the problems in getting a sufficiently randomized, statistically significant sample from your friends tragedies, in order to actually know what insurance is good - you probably have no idea who your friends are insured with. Somebody tells you about the tragedies of their life, and you don't say, hey, so I can avoid them, who provides your insurance?

Oskar Shapley writes:

[Comment removed for supplying false email address and for rudeness. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog.--Econlib Ed.]

Barry writes:

Krugman has some comments, and links to some good stuff:

http://krugman.blogs.nytimes.com/2009/08/04/insurers-only-pull-your-coverage-when-it-hurts/

Piri writes:

I think it's obvious that the bad reputation of the health insurance companies in America, captured audience or not, will be hurting them in the near future. Sooner or later we will get the reform we need or they will have to find a way to actively repress our anger and outrage at their abuses. The pressure will continue to build until then, it's simply unsustainable.

If it wasn't for their bad reputation Congress wouldn't be on the verge of reforming them, doctors and nurses wouldn't be joining political groups to fight them.

There's more than one way to skin a cat.

Dirtyrottenvarmint writes:

Dezakin said it correctly.

P/C insurance and healthcare are two entirely different beasts. The story regards German p/c insurers. Reputation is important in p/c insurance because it is essentially odds-making. It is not certain, nor even particularly likely, that your house will burn down. However, if it does burn down you would like to be reasonably certain your insurance will pay.

Healthcare is not insurance, it is a payment scheme. The large majority of healthcare costs come towards the end of life. Anyone who has kept up with the writing of Bryan's colleague Arnold should understand this. You are all going to get sick or injured and die someday. It is inevitable. When you pay a premium to a health "insurer" you are not "insuring" against anything. You are merely pre-paying for something that is going to happen in the future. Only in a small minority of cases does the equation work out differently. Thus, yes, health "insurers" do not have the same degree of reputational risk as do p/c insurers. The health "insurer" ensures that you pay approximately the full cost of your healthcare - you just pay it over time not all at once. Since the "insurer" already has your money, there is little risk that it will be unable to pay claims - only the same risk (of fraud) that you run in any economic transaction. Comparatively, with a P/C insurer there is a not insignificant risk that if your entire neighborhood is destroyed by an earthquake, the insurer will be unable to pay. Thus a P/C insurers reputation for reliability is often very important. This is why P/C insurers have ratings (the reliability of the ratings agencies I'll for someone else to address, perhaps.)

Again. "Health insurance" does not exist in the world today. Bryan's story is about P/C insurers. They are entirely separate industries.

OH writes:

The author of this article is a fool, the conclusion here is that the insurance companies are as usual as always - acting completely completely selfish.

Sam Dobermann writes:

That the analogy is not related has been dealt with; besides the Jews were the targeted scapegoats – as a group. Most Germans would have approved of non–payment. But the insurance industry brought in a significant portion of Germany's foreign income. Thus reputation was very important; clients had a world of choices if they lost trust in German insurance industry.

In the health insurance industry there a few choices for employers; most states have just two major companies operating in their states, and most employers just offer a choice of policies from one company with different coverage choices.

The industry wide practice of rescission is a major problem in the individual policy market. It cannot occur in employers group insurance which is not individually risk rated. (However in small groups when one person develops a catastrophic health care need – say most cancers – the insurance companies very frequently sets the group rates extremely high for the next year and make it clear that there will be no lower price – unless the ill person leaves their employment. So they are frequently forced out.) If the employer tries to change insurers they find high rates everywhere. This information is available through the MIB, the medical information bureau which collects all information from all sources.

All member firms can access this information on individuals before writing policies. Most don't get the available information before writing a policy because most people don't have an unforeseen health care disaster and are easy income. For those that do, a quick investigation ensues because rescission is a handy tool. Many firms have done this so egregiously that in California they have documented this and assessed large fines against a number of large firms. Yet three execs when called on the carpet at a House hearing, when asked if they would stop except in cases of intentional fraud, said no, they would not stop. So much for caring about reputation.

As to the silly idea that insurance is just prepayment for the big end of life expenses, and that catastrophically expensive medical needs are rare, he needs to learn something about life and healthcare. I guess he has never heard of Medicare which covers virtually everyone from 65 on. The private insurance industry has very little to do with end of life expenses. Those expenses can't be the reasons for paying each month.

Insurance corporations don't worry about their reputation among employees or individuals purchasers; (almost) everyone has to buy coverage from one or another of a fairly small group. They do worry about their reputation with Wall Street for profitability and earnings growth. Since management and directors are each holders of large amounts of shares or options, their personal wealth depends on their reputations with Wall Street.

Every payment out on behalf of an insured is a "medical loss" and subtracts from their bottom line. And that hurts their only reputation that matters to them.

Alex writes:

I call Godwin's Law!

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