Everybody hates this business, but it can teach you how to win in trading

We had to choose a new health insurance plan recently which reminded me just what a scam the health insurance business is.
 
There really is no business in America quite like it.  It can charge you up to $25,000 per year for family coverage and literally provide you nothing in return except an annual check-up and a blood test. Truly, it is the perfect business model. It collects money every month. You can never cancel it. It tries everything in its power not to pay out claims while making carry on the money it collects.  It’s the easiest 40 billion dollars of profit in American commerce. 
 
I am exaggerating but just barely. The basic health plan in America has a $10,000 deductible before it pays out a dime for health expenses. So unless you get run over by a car every year, or catch cancer or have a heart attack your health insurance pays for NOTHING. Food poisoned? Flu?  Cut finger? Even Covid. Suck it up, big boy. It comes out of your pocket first despite paying more money in premiums than you do for a mortgage.
 
The health care insurance companies may be the scummiest businesses on earth but they are also brilliant at what they do and we as traders can learn a lot from their tactics.
 
The first thing insurance companies always do is capitate. This is a fancy word for placing risk limits. Basically no single individual is an uncapped risk. Every policy comes with a hard money stop so that no one chronically ill person can’t bleed them of their capital. Usually, most health insurance policies stop payouts after $1 million dollars. Most of us, of course, have no idea that this exists because fortunately most of us will never accrue such large medical costs. But you can be sure that the guys on the other side of that trade know this cold and we should all keep that lesson in mind next time we are mindlessly plowing money into a losing position hoping that it will resuscitate.

But if stop losses are the foundation of the insurance business, the most important business practice in the industry is discrimination. No one discriminates quite like the insurance companies. If they had their druthers they would offer policies just for guys like me - a 50-something  who rarely gets anything more than a cold, has no history of surgery or illness and takes zero prescriptions while happily paying them $20,000 a year for  “peace of mind”. 
 
The famous line from the Wire is that nothing in life is more expensive than “free”, “peace of mind” comes a close second.

In any case, until they were forced  by Obamacare to stop it,  insurance companies were the greatest discriminators in the world, using reams of data analysis to approve only those customers who were never likely to get sick. In short, insurance companies always look to make as many “winning trades” as possible. They do this by walking away from even the slightest threat of risk. 
 
Imagine two customers John and Jack - both 40-year-old males. John is as trim as he was in high school, runs three miles every other day, and eats organic food only. Jack smokes two packs a day, is 100 pounds overweight and often wakes up in his rumpled clothes after consuming a bottle of Jack Daniels the night before. John’s premium may be just $2,000/year and Jack’s may be $8,000 for the exact same policy, but most insurance companies would find a reason to reject Jack even if he was willing to pay them $16,000.
 
Because they are not stupid. They know that with John they are likely to have 20 years of carefree money collection whereas Jack is a heart attack waiting to happen and no amount of premium upfront would offset their losses if Jack ended up face down on some the bar floor with an EMT straining to shove his blubbery body into an ambulance. It doesn’t matter how much Jack is willing to pay for his coverage, the risk is never worth it.
 
 Scummy or not, health insurance companies are masters of controlling their environment by relentlessly discriminating against risk. We can certainly question the morality of their tactics, but we can’t ignore the effectiveness of their approach and since the only thing we traders ever kill is money, adopting their methods won’t compromise our values but almost certainly could improve our results.