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With the recent passing of health care reform, many people are wondering what the purpose is, in the first place, of liability business. Car insurance companies, health insurers and homeowner’s insurers are all standards of American protection, but considering that they have a profit margin to make while social models do not, it is now widely open to debate as to which is the better model and why.
For starters, the obvious is right out there: private insurers have a disadvantage in the realm of raw resources. They have to make a profit, and also have to have overhead (advertising campaigns, etc). Because social models are centralized, these issues do not come into play; participants simply agree to take part in the system, and the money spent competing becomes reinvested into the system, whereas the opposite is true with liability business; car insurance companies, for example, spend lots of money on advertising, which ends up being considered as waste.
However, there is an economic advantage to the private system, which takes place in the form of competition. Because the private marketplace must compete in order to maintain a profit, very often it does so to the advantage of the consumers (and sometimes revolutionizes the entire market in so doing). As another example of liability business, car insurance companies remain very popular amongst the people, because their history of market competition has proved beneficial. Many businesses, like GEICO and State Farm, have evolved out of a need to fulfill a certain niche market, such as farmers or state employees. This came about because of the profit incentive. Had this been handled by a social system, there would have been very little incentive to create the exceptions. Not to mention less incentive not to overuse them; because the private model internalizes costs, the consumer is more cautious of his actions.
Both systems have pros and cons, and it is important to understand under what circumstances they are applicable.