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Source link: http://archive.mises.org/4771/uncertainty-and-its-exigencies-the-critical-role-of-insurance-in-the-free-market/

Uncertainty and Its Exigencies: The Critical Role of Insurance in the Free Market

March 7, 2006 by

In this transcript of a lecture at Mises University, I explain the neglected role of insurance in a free market economy. Any insurance involves the pooling of individual risks. Under this arrangement, there are winners and losers. This is a form of income redistribution , but the characteristic mark of insurance is that no one knows in advance who the winners and losers will be. Also, there are many uninsurable risks; for the state to intervene only creates choas. FULL ARTICLE

{ 60 comments }

Person March 7, 2006 at 8:17 am

Some errors I think I found in this latest by Hoppe:

He claims certain things can’t be insured when in fact they commonly are insured, and with no state intervention or coercion.

In contrast, take for example the risk of committing suicide. Would it be possible to insure oneself (to pool one’s risk with others) against suicide? The answer should be quite obvious: such a thing is not a viable venture for an insurance company. After all, I have full control over whether or not I deliberately kill myself. An insurance company that offered suicide insurance would of course attract potential suicide candidates. I could go there because I want to do my wife a big favor, pay the premium, shoot myself dead, and then my wife will be a millionaire. Insurance companies that would insure such a thing would likely disappear from the market very quickly.

Actually, from the wife’s standpoint, it is insurable because she has no control over this, and stands to lose when the husband dies. For this reason, people can insure against the death of the husband, and husbands often do “cash out” for their wifes. Yet the life insurance market lives. Similarly:


Now take the example of unemployment. …Unemployment is an uninsurable risk. I have full control over being employed or not being employed. … I can almost always make sure that I will be employed if I am willing to take drastic wage cuts, for instance. If I were to work for free, I would be employed.

First, the “working for free eliminates unemployment” is irrelevant because unemployment insurance refers to insurance against not having a paying job. Second, it is simply not true that simply bidding low will guarantee you a job, even if no wages or benefits were mandated. For one thing, finding an opening takes time, and during that time, you will be unemployed despite bidding low. Second, there are severe adverse selection problems in the job market (which are worsened but not caused by the state). If I have a PhD, bidding low won’t guarantee me a job, because every employer will assume that I’m going to bolt in the (presumably short) time until a better offer comes along. (Also, simply bidding low will send out other signals that I am not worth employing.)

Peter March 7, 2006 at 8:38 am

Two problems I spotted: (a) it’s “sickle-cell disease”, not “cycle-cell disease”, and (b) “[w]e get either tremendous shortages of certain services, as in places like Canada where you can’t get certain treatments and there are one- or two-year waits for others.” is incomplete — we get either tremendous shortages, like in Canada, … or what?

N. Joseph Potts March 7, 2006 at 9:01 am

Odd not to find the term “moral hazard” in a disquisition of this length on this subject. The term would have made a better title for the piece than the title used.

Since income and work conditions for doctors have been beaten down (by government and insurers) for doctors in the past decade or two, a veritable epidemic of “disability” has struck the group. One of my neighbors is a (very healthy-looking) “disabled” doctor. One of my lawyer friends SPECIALIZES in representing doctors in disability claims. I am none of these (not doctor, not lawyer, not disabled).

Ulrich Hobelmann March 7, 2006 at 9:06 am

On the topic of free market and discrimination: I agree that many risks can be called “uninsurable”, and that discrimination could be applied, but that doesn’t mean that an anarchist’s world would be cold and risky.

If you’ve ever argued with anybody about libertarian opinions, you know what I mean: most people *want* aspects of the current system (me included). The beauty of a free market is that we can all choose to take part in an insurance that does cover heart transplants, that does cover short periods of unemployment, or other risks, even if these are related to personal lifestyle.

Maybe all that would raise insurance costs a few percent, but I think many people would gladly pay the price to have more safety (and the oft-cited-by-socialists Togetherness) in society. However, unlike in the current system, a lack of cartels and regulations would probably make costs drop sharply for many common services and drugs.

The difference between our healthcare system (the US or the German one) and a free market system isn’t really discrimination, but regulation by a centralized cartel of “medical experts” and holier-than-thou-wannabes.

Jon Roth March 7, 2006 at 10:02 am

I agree with Hoppe that regulation should cease in the health insurance market. From what I’ve seen on the commercial prop/casualty side, many insurers are beginning to come up with sophisticated models that account for many more variables in determining premium than before. The same is true in personal auto. The health insurance market is much more homogenous than the comm. prop/cas side so such models would be much easier to develop. The hope of lower premiums would provide monetary incentives for healthier lifestyles. And regardless of Hoppe’s opinions on what should and shouldn’t be considered insurable, I’m sure he would acknowledge that in a free market it would be up to companies to decide what products are offered and let the market determine their viability.

Nick Bradley March 7, 2006 at 10:04 am

Person: The only way that suicide can be covered by life insurance is through fraud. From my understanding, most life insurance policies have a clause that says suicide is not covered. Therefore, fraud is the only way to cover suicide.

I also disagree with you on unemployment insurance. Simply put: there is no way to prove that your unemployment circumstance was not an act of your own volition.

Even if there are no jobs on the market, one can undertake self-employment.

Paul Marks March 7, 2006 at 10:10 am

Sadly in the United States there is BOTH regulation by doctors (or rather by the government backed A.M.A. cartel) AND “antidiscrimination” regulation (along with other types of regulation.

The bottom like (as Dr Hoppe knows) is as follows: Governments should not mess about with ordinary contracts.

On can conduct interesting thought experiments about contracts to sell oneself into slavery or to offer oneself up to be eaten for dinner – but “hard cases make bad law” (one might also question the “soundness of mind” of those people who sign such contracts).

In the ordinary run of events it should be up to a seller (in this case an insurer) to state what price he is prepared to sell at AND what the product is that he wishes to sell.

If the potential buyer does not like the price or the product he should go another seller – if no one offers him what he wants at a price that he wished to pay then he must make a choice about whether he values the product or the money more highly (almost needless to say, government regulations can not reduce the cost of a service in the long term – they just drive the service off the open market).

“You must sell insurance that covers X, Y, Z,” is nonsense.

As Dr Hoppe points out – if people want a better product (for example a medical insurance policy that covers the costs of buying a wig) they should accept that they are going to pay extra (or lose coverage of some thing else).

Otherwise we get wonderful all covering insurance policies – that many people can not afford at all.

Then the left scream “X million people have no medical cover” – when they supported the regulations that made health insurance so expensive that these people could not afford it.

On the specific “antidiscrimination” point:

Of course private companies (and individuals) should be allowed to discriminate.

Discrimination is about choice. If people can not choose who they will do business with, and under what conditions, then they are not free.

If some leftists, for example, dislike the idea of H.I.V. positive people being charged more for health insurance then the solution is in their own hands – let them offer medical cover to these H.I.V. positive people THEMSELVES.

Let THEM offer the service that they say the insurance companies should offer – and at the price they say it should be.

The “compassion” of the (often very wealthy) “liberals” is a lie – they will not offer the service at their own expense. They demand that other people (the existing insurance companies)do it – at the expense of the poor who are no longer able to pay inflated insurance costs.

Person March 7, 2006 at 10:21 am

Person: The only way that suicide can be covered by life insurance is through fraud. From my understanding, most life insurance policies have a clause that says suicide is not covered. Therefore, fraud is the only way to cover suicide.

Your understanding is wrong. People have committed suicide. Insurance has paid out in such cases. Indeed, it must be insurable. It is the wife who wants to insure the husband’s life. She has no control over whether he takes his life. Indeed Hoppe’s analysis “proves” that no one can buy liability insurance, i.e., insure against the damage they could cause to another driver. This directly contradicts what he says elsewhere in Democracy where he says that a free market would require immigrants to carry liability insurance.

I also disagree with you on unemployment insurance. Simply put: there is no way to prove that your unemployment circumstance was not an act of your own volition.

That has nothing to do with what I said. I don’t contest my point. In my point, what I was contesting was that you can always guarantee yourself a job simply by bidding low. The reason is that 1) there is frictional unemployment (i.e., for the employer to prepare for you), 2) Adverse selection may make you unemployable at any price for fear that you will flee for a better offer, and 3) bidding low can send bad signals.

Even if there are no jobs on the market, one can undertake self-employment.

Yet one has no control over whether other free-willed humans decide to buy one’s things.

Nick Bradley March 7, 2006 at 10:39 am

Person:

Point #1: any person who has collected on a life insurance policy after committing suicide has committed fraud.

Point #2: IT IS POINTLESS to get insurance for possible unemployment. Isn’t that what “saving for a rainy day” is all about? If the person saved those premium payments instead, he wouldn’t need the isurance!

Person March 7, 2006 at 10:57 am

Nick:

Point #1: Any person who has collected on a life insurance policy after committing suicide has not just committed fraud, but also resurrection.

The insurance is for the wife, not the deceased.

Point #2:You’re still not addressing my point. For the second time, I’m contesting Hoppe’s “if you bid low you will always have a job” point. Do you have anything to say to this? If not, stop bringing it up.

Dan Mahoney March 7, 2006 at 10:57 am

Person:

Please provide detailed documentation of your
assertion that insurance companies have paid out
claims that result due to suicide.

A.B. Dada March 7, 2006 at 11:09 am

What I’d really like to see is more insurance policies for detrimental situations. In even recent years I was able to better plan for insurance by raising my deductibles higher and higher, but now in health care it is very hard to find insurance for ONLY big emergencies. I’ve always prepaid in cash for medical service (visits, prescriptions, checkups, etc) and kept my deductible high, but it seems the plans are slowly disappearing. This is also true in car insurance.

I don’t want to co-opt people’s stupidity when they attempt to use insurance to level out their cash flow. For me, insurance is only for HUGE losses. We can see why insurance in general is so expensive, with the average citizen using it for common ailments.

Som March 7, 2006 at 11:16 am

Look, the ONLY things that really can be insured will be things outside any influence of a person’s action. My dad’s in insurance and I remember once him arguing with a client, because she was complaining she should get more compensation for her husband dying that she was too sad to work. My dad told her something profound (at least now i think it’s profound)

He said “insurance cover’s things, not feelings!” Real physical losses are covered (which happen completely outside of the victim’s free will) not his psychic losses or whatver…

Thats why unemployemnt insurance is so absurd! “i feel like there’s no opportunity out there, i dont know where to look”. Also, think about this, people who use any “insurance” more generally see an increase in their rates..

Someone who gets fired repeatedly will not have much to pay with no? Also what is the company going to pay him back with? is there a minimum wage?

Any company could prop up a crummy ass job, or hell, an insurnce co. could send a recently laid off doctor a mcdonalds application. “there now your fully unemployed by your free will and we have no liablility” I doubt many doctors would pay a monthly premium for that!

and by the way, if there is a any kind lay off strictly by bad market conditions, many companies already give something to workers that make umemployment insurance even more laughable…

it’s called a Severance Package!

Person March 7, 2006 at 11:24 am

Please provide detailed documentation of your
assertion that insurance companies have paid out
claims that result due to suicide.

Seriously? You actually want to contest this point? Imagine this scenario: I get in a car and do 80 mph down a country road. Oops I veered off, hit a tree, and died. Looks like I just feel asleep at the wheel. No suicide ruling.

Banks buy lender’s insurance as well. If the debtor dies and can’t pay it back, they get money. Even if it’s through suicide.

The burden is on the person making the claim. All you have to do is find one instance of an insurance company saying “Sorry, we’re not going to pay out because it was suicide.”

Dan Mahoney March 7, 2006 at 11:28 am

Person,

Yes, I am quite serious. Provide a real-world
example to support your claims; don’t leave it
to the imagination. (Given your self-confident
attitude, this shouldn’t be too hard.) If you
cannot, I have to assume you are a bullshit
artist.

Vince Daliessio March 7, 2006 at 11:30 am

Bad examples or no, Hoppe’s article does point out the crux of the problem – government meddling in insurance and related industries has placed a series of tiers of props under some very rickety edifices, preventing natural economic adjustments that would benefit all by reinstituting freedom of contract and property rights.

Insurance regulations and the AMA cartel are two things that prevent the market from adjusting to this state. And unemployment insurance is a joke. Despite the fact that some truly deserving people occasionally get more than a pittance from it, it is largely a taxpayer-paid vacation subsidy for union members, and should be abolished.

Person March 7, 2006 at 11:36 am

Dan: Hoppe’s claim about suicide insurance was just a special case for his general claim that “you can’t insure what you have control over”. That would imply that you can’t buy liability insurance. Yet you can. Do you really want to claim no one ever sells liability insurance? It’s been going around long before the state got involved in insurance. Before I dig up life insurance contracts, do you agree that this broader point is false? Do you still think I’m a bull**** artist?

Vince Daliessio March 7, 2006 at 11:37 am

Person,

Allow me to point out your ignorance – life insurance policies ROUTINELY exclude suicide as a payable claim, particularly in the early part of the policy life-cycle. Read any commercially-available policy declaration.

Meanwhile, the tax-preferred status of life-insurance proceeds has spawned an explosion of so-called “dead janitors” policies, where employers cash in tax-free when an employee dies;

http://moneycentral.msn.com/content/Insurance/P64954.asp

Paul Edwards March 7, 2006 at 11:39 am

“It is the wife who wants to insure the husband’s life. She has no control over whether he takes his life.”

Are you sure? :)

Vince Daliessio March 7, 2006 at 11:42 am

Person,

Liability insurers estimate and grade risks and do not insure unacceptable risks (or price them out of the market). This tends to limit the practice of abusive claims for controllable risks, while preserving the insurability of uncontrollable risks. So you are wrong again.

Person March 7, 2006 at 11:49 am

Vince: how am I wrong? Hoppe said, you can’t insure what you have control over. You have control over whether you victimize someone. Yet you can insure that. Are there disincentives? Sure. Is it stupid even while insured? Of course. Yet you have control over it, and you can insure against it. Ergo, Hoppe is wrong.

Your link about dead janitors proves my point as well. The janitor has control over whether he kills himself. The employer does not. The employer can insure against this contingency. What makes you think a wife can’t do it?

Paul Edwards March 7, 2006 at 11:51 am

“I get in a car and do 80 mph down a country road. Oops I veered off, hit a tree, and died. Looks like I just feel asleep at the wheel. No suicide ruling.”

You mean beneficiaries of suicides conceivably have collected fraudulently because suicide could not be proven. That sounds plausible.

Vince Daliessio March 7, 2006 at 12:07 pm

Person;

“Vince: how am I wrong? Hoppe said, you can’t insure what you have control over. You have control over whether you victimize someone. Yet you can insure that. Are there disincentives? Sure. Is it stupid even while insured? Of course. Yet you have control over it, and you can insure against it.”

Perhaps we have to define our terms better. Can an insurer make the mistake of insuring bad risks? Happens all the time – insurers and underwriters are human. And governments routinely force the insurance of risks under the control of the insured – unemployment insurance is one. In aggregate, however, risks substantially under the control of the insured cannot be economically insured against, therefore Hoppe’s point is valid, your examples notwithstanding.

Person March 7, 2006 at 12:18 pm

Vince: The claim is that risks substantially under the control of the insured cannot be (economically) insured against. If I ram another driver in my car, intentionally, that is covered by liability insurance. Ergo, the claim is false. Period. Now, you can claim the liability insurance market exists only because of the state, but that would be very hard to maintain, since liability insurance has historically been purchased even while not required by the state. In any case, like I said above, Hoppe believes immigrants would buy liability insurance in a free society, so even he doesn’t think one can insure against what one can control.

Where’s Bob Murphy (here, RPM)? His Chaos Theory details a system in which people routinely insure what they can control.

If you want to narrow down your point to “well…you just can’t insure against unemployment!”, fine, but it’s not based on any more fundamental principle, like Hoppe is trying to claim.

J. H. Huebert March 7, 2006 at 12:52 pm

I agree with Dr. Hoppe’s general point, but it seems to me the market likely would provide short-term unemployment insurance to some people (not everyone), because the costs of transitioning between jobs of similar pay help eliminate the moral hazard. I am also inclined to think such a thing would exist on the market because my credit cards constantly offer me insurance to cover my payments in the event of temporary unemployment.

D. Saul Weiner March 7, 2006 at 12:56 pm

Dr. Hoppe has written an excellent piece, but there are a number of points which are somewhat oversimplified:

1) The first part talks about winners and losers in insurance, but this is misleading. When properly structured, insurance functions to restore the beneficiary (economically speaking), in whole or in part, to the position they were in prior to the occurrence of the insurable event. When your house burns down and the insurance company replaces it, you are made whole, you haven’t “won”. This is really what differentiates insurance from gambling.

2) Hoppe overstates the case when he says that every risk that may be influenced by one’s actions is uninsurable. For example, if one has a dangerous hobby (e.g. skydiving), he may be able to get life insurance, though certainly he will pay more for it.

3) Suicide is not a covered event for most life insurance policies, though companies are forced to pay up in cases where the suicide occurred at least 2 years after purchase, due to state regulatory requirements.

4) One significant point that Hoppe omitted in the case of Health insurance, is that for most people who have such coverage in the U.S., it is through their employer. In addition to all of the problems he described, they typically only pay a small portion of the premium and, their cost is entirely independent of the risk they present (beyond distinctions such as individual versus family coverage).

5)Hoppe correctly mentions many of the problems related to the FDA but does not mention their continual efforts to restrict or eliminate alternative products and services which compete with the vested interests.

6) The reference to “Chevy doctors” is only part of the problem. Sure some types of problems could be more efficiently treated by physician assistants or nurses. But many highly qualified doctors who come up with cheaper, more effective treatments are hamstrung by the licensing system which seeks to block such innovation in favor of the lucrative, entrenched approaches.

Nick Bradley March 7, 2006 at 12:58 pm

A.B. Dada: Despite their faults, many GOP members of Congress are pressing for legislation that would make it easier to purchase Catastrophic Health Insurance Policies(CHIPs). Rep. Shaddeg (R-AZ) is pushing for a law that would allow cidividuals to buy health insurance across state lines, thereby nullifying most of the absurd state-level insurance regs (like mandatory acupuncture coverage, etc.)

billwald March 7, 2006 at 12:59 pm

Medical “insurance” is NOT insurance but is a pre paid medical service.

When it started out as “major medical” it did conform to insurance principles.

quasibill March 7, 2006 at 1:11 pm

I’m not sure I buy the argument that unemployment insurance couldn’t exist outside state interference. Just as a quick example – I get in the mail at least twice a year promotions from my credit card to purchase “payment insurance,” which they market as a protection for when/if you get laid off, etc. As far as I know, noone forces them to do it, and it does make sense for them to do it.

Further, someone commented that unemployment insurance is the same thing as savings. However, I don’t think that holds much water either. I can see a fair market for people who change jobs to work in a risky start-up wanting to have some form of insurance against the possibility that the start-up fails and they are back on the job market again in 6 months. They might pay a decent premium to give them some “cushion” that they can use to look for an equivalent job in the case of a failure. In essence, the person would “lose” the money if the company doesn’t tank, but in return they’ll get more than they could have saved in that period if it does tank. I guess you might define it as some sort of hedge or bet, but the distinction would be somewhat murky.

Granted, unemployment insurance wouldn’t look like it does now, but that doesn’t mean it couldn’t exist. I don’t know, but it doesn’t seem like too much of a stretch to imagine a market for unemployment insurance when you start from the position that all value is subjective.

Ulrich Hobelmann March 7, 2006 at 1:14 pm

J.H. Huebert: sure, somebody can provide insurance against unemployment, but it’s probably at a loss.

In Germany we used to have mandatory unemployment insurance (paid through income taxes); it seems to be slowly disappearing now. What people do (I think most if not all of them) when they are unemployed, and they are eligible for, say, six months of insurance payments, is that they only look for a job that starts a few months in the future, so they can collect payments for “free”, while going on vacation, cleaning the house, staying home with their kids etc. in the meanwhile. I’m not sure that that’s a good thing for society, even though I agree that something like one or two months of interim payments makes sense for most people.

Curt Howland March 7, 2006 at 1:17 pm

Nit-picking in spades, folks.

Any act can be insured against, the problem is one of viability. A “liability” insurance could easily be gotten at a reasonable price that explicitly excluded volitional acts. Covering a tree that falls on the neighbors car, for instance, unless they demonstrate that I cut the tree deliberately so that it would fall on the neighbors car.

Fire is an excellent example, because everyone understands that if you’re caught burning your own house down the insurance company won’t pay even though you have a “fire” policy.

A friend of mine is convinced that he has to spend something like $300/month for full health conerage in order to have insurance against awful, expensive things. He ends up nickled and dimed for little things while the waiting room is filled to overflowing with “old folks” who have all the time in the world to spend going to doctors again and again for their inevitable aches and pains.

Vince Daliessio March 7, 2006 at 1:36 pm

Person says;

“If I ram another driver in my car, intentionally, that is covered by liability insurance. Ergo, the claim is false.”

It is covered by liability insurance only insofar as it is impossible to discern your intent. However, if there is evidence that you planned the “accident”, then it is a clear case of fraud and is not, in retrospect an insurable risk, and your claim will be denied. Hoppe’s claim is supported.

Vince Daliessio March 7, 2006 at 1:43 pm

D Saul;

Add in the ridiculous drug patent system and the “War on Drugs (that we don’t like and can’t profit from)” as another factor in the amazing cost of medical care in this country.

Jon Roth March 7, 2006 at 1:46 pm

I agree with “Person” to a certain extent. Liability insurance does cover events that are in the control of people. Insurers pay damages that come from unsafe premises, faulty products, negligent driving and more. Each of these are at least partially in the control of the insured. The examples “Person” sites are when insurance pays under false pretenses due to lack of perfect knowledge. Insurance even though a moral hazard is present. Insurers minimize this through conditions, deductibles and information gathering. Of course, insurers can’t avoid this possibility completely and so the moral hazard risk is factored into the premium.

Nathan March 7, 2006 at 1:48 pm

Hoppe makes excellent points throughout his piece. I really don’t think Hoppe would have a problem with those who prefer insurance for risky acts of their own volition– as long as they are allowed to share those risks with others in a pool of likeminded individuals. An insurance company covering such a group would demand extensive premium payments to cover the overwhelming risk that some members would indeed engage in detrimental behavior. The premiums necessary to provide such coverage in a free market context would prevent most if not all from taking up such insurance thus creating the necessary role of individual responsibility.

Beyond the overregulated private insurance market, and as Hoppe briefly addresses in his commentary, public assistance in the realm of healthcare is where incredible perversion takes place. It is in this environment that payment for costly risks are levied against the taxpayer while the recipient of that insurance has no fiscal incentive to engage in behavior that would prevent a negative health outcome (other than his or her own well being). This creates a system that welcomes excess and completely bans cost equilibrium from entering the equation. Unequivocally, this is the breeding ground for future problems of a considerable magnitude.

Vince Daliessio March 7, 2006 at 1:58 pm

Nathan;

It isn’t just the PUBLIC health insurance market that so monstrously distorts the market and creates moral hazard by subsidizing risks – the employer-provided private market is a massive creator of moral hazard too. Because of the tax-preferred treatment of employer-provided health insurance, it is employed as a stream of tax-free wages rather than true risk insurance, with predictable consequences.

Yancey Ward March 7, 2006 at 2:00 pm

Person,

The key to the misunderstanding about suicide and Hoppe’s position can be found in the quote you included in your first comment:

Hoppe writes-Would it be possible to insure oneself (to pool one’s risk with others) against suicide?

Your counter-examples apply to policies purchased by third parties, or involve outright fraud and/or mistake. The latter two of these are accounted for actuarily, and are included in the cost of policies for a given risk group. Even in third party purchases, there are likely to be exclusionary riders attached, or higher premiums, depending on the relationship between the purchaser of the policy and the person insured. None of these show Hoppe to be wrong since they don’t actually address the point he made.

In addition, your point about liability insurance is also not a valid one. It is not possible to insure one’s self for the costs of intentional torts against third parties. If you already have insurance, you may get away with filing claims once or twice, but eventually you will become uninsured, in a free market that is, as Hoppe would point out.

Hoppe is pointing out that you cannot, in a free market, insure yourself against acts that are within your partial control. Any insurance company that attempts to do so will find that it will insure only those who actually file claims for such acts- those who know they will not perform these acts will not purchase such policies. The result is that the insurance company either goes bankrupt, or the premiums required are so high that even these bad actors won’t buy them.

Paul Edwards,

I laughed my ass off at your comment relating to the amount of control one’s wife has over one’s desire to live.

Nathan March 7, 2006 at 2:20 pm

Vince, I completely agree with your assertion concerning employer-provide health insurance. The employer-driven market is a failed, leftover expereiment from post WWII days. Yet, there is something to be said for the capacity of employers to offer an atmosphere where shared risk pools can actually occur. This becomes incredibly difficult in the individual market where the chronically ill consumers face a costly, uphill battle of adverse selection. And— I think both you and I would strongly oppose any government-mandated system that would attempt to recreate the employer-group dynamic in a public setting for those unable to get insurance elsewhere. I think that the employer-based system is so engrained in society that undermining its significance might result in a very tragic momentum shift toward a universal single-payer system. The fragile and limited sanctity of the health insurance market as it stands now is much preferrable to an overt and unprecedented step toward the harsh grasps of Canadian-style socialism. That must be avoided at all costs. I believe there is something innovative we can do to sustain the employer settings where health insurance works and provide equal tax preference for those without that option.

quasibill March 7, 2006 at 2:22 pm

“Hoppe is pointing out that you cannot, in a free market, insure yourself against acts that are within your partial control.”

I think the point is that you can’t insure yourself against acts that are within your complete control – like suicide. Insurance can and does provide coverage for acts that are partially within your control – negligence and even in some cases recklessness.

And getting back to the unemployment insurance, a person at a given salary could purchase such insurance, with a benefit period, where premiums would be based on the income range you would be entitled to and/or triggers coverage. Perhaps in the unemployment arena, it would be helpful to differentiate between what is within your complete control – whether you are “employed” vs. what is not within your complete control – whether you are “employed” at a given income level.

Finally, wouldn’t you need some form of liability insurance that covers intentional conduct in a stateless society? I would probably demand that those who I deal with would have some form of that coverage to protect me if they turn out to be criminals. I think there is precedent for it, as well, in anarchic Ireland and Somalia. Of course, it would be true that recidivists would quickly become uninsurable, but the point is that even acts completely within the control of the insured can be insured on a one time basis even for contingencies completely within the insureds control when coercion is absent from the insurance market.

Yancey Ward March 7, 2006 at 2:32 pm

quasibill,

I will grant your point, but I think it slightly misses Hoppe’s. I can insure myself for negligence, but if I repeatedly display such behavior, I will pay for it more than the insurance is worth. Such insurance can only be permanently obtained by the truly reckless by forced subsidization by the prudent. Even the most negligent, or intentionally destructive, will not purchase policies whose premiums are paid for only by like-minded individuals. In other words, you may be able to insure yourself against unplanned negligence, but, at some point, it become volitional and uninsurable.

Geoffrey Allan Plauche March 7, 2006 at 2:42 pm

I think that there is a difference between the insurance provided by insurance companies and the “insurance” that might be provided by mutual aid societies like the old fraternal associations of the 19th century. Unemployment insurance may not be economically viable in the long run but it can and has been provided by mutual aid societies. The difference with the latter is that they are better able to deal with moral hazard than are insurance companies or the government.

Person March 7, 2006 at 2:56 pm

“If I ram another driver in my car, intentionally, that is covered by liability insurance. Ergo, the claim is false.”

It is covered by liability insurance only insofar as it is impossible to discern your intent. However, if there is evidence that you planned the “accident”, then it is a clear case of fraud and is not, in retrospect an insurable risk, and your claim will be denied. Hoppe’s claim is supported.

False. The liability insurer would be expected to pay. Please, learn about actual insurance markets. This happens all the time. You might as well claim liability insurers never have to pay the claims of drunk drivers. Hoppe’s claim is not supported. Or rather, he’s right, except when he’s wrong.

Person March 7, 2006 at 3:02 pm

Yancey:

Your counter-examples apply to policies purchased by third parties, or involve outright fraud and/or mistake.

The distinction is irrelevant. You agree that a wife could insure against her husband’s suicide, since she has no (direct!) control over that, and would be hurt by it. Why don’t you agree that she could send him the bill? You agree that an employer could insure against employee vandalism. Why don’t you agree he could impute the cost out of wages, like what happens all the time?

In addition, your point about liability insurance is also not a valid one. It is not possible to insure one’s self for the costs of intentional torts against third parties.

False. In many businesses, especially construction, they do this all the time.

Hoppe is pointing out that you cannot, in a free market, insure yourself against acts that are within your partial control.

And Hoppe is wrong in this respect. I have partial control over whether I crash into someone’s car. I have partial control over whether my factory burns down. All of these are insurable.

D. Saul Weiner March 7, 2006 at 3:06 pm

There is nothing to prevent insurance companies operating in a free market from insuring people who choose to take on measured risks. Life companies will provide insurance to smokers and people with dangerous hobbies, albeit at a higher rate than those who present a lower risk. I imagine there is even insurance for “stunt” people, though I don’t know for sure. Of course, in a free market, the risk is not spread across different risk classes.

I saw a disturbing segment on 60 Minutes last Sunday. It showed how hospitals routinely charge 2-4 times as much for the same treatment to the non-insured as they do to those who are privately insured or covered by Medicare or Medicaid. I imagine most viewers came to the conclusion that this is a just a case of the free market gone wrong, how the people who can least afford a big hospital bill are getting screwed over. As for me, I am inclined to believe that we are seeing the effects of hospitals trying to compensate for the inadequate reimbursement rates dictated by the feds.

SteamshipTime March 7, 2006 at 3:16 pm

Person,

Auto liability insurers are required to pay on intentionally inflicted injuries by vehicle only because of the court-enforced public policy behind mandatory insurance laws.

Outside of this narrow exception, intentional acts are routinely excluded because liability insurance against intentional injuries presents an unprofitable moral hazard.

This is not to say that you could never find an insurer willing to underwrite you for your own intentional conduct, but the premium would be equal to the entire loss insured against. Since insurers compete for premium dollars from good risks, not bad risks, you would be effectively priced out of the market.

Yancey Ward March 7, 2006 at 4:06 pm

Person,

Read the quote you lifted from Hoppe’s article. He explicitly writes that one cannot insure one’s self. The wife and the employer are third parties. However, even the wife will find it difficult to purchase a policy that will pay if the husband kills himself within two years.

For example, let us suppose company A sends out an ad stating that it will sell insurance policies even to wives whose husbands kill themselves. What will happen? Some husbands, who plan to kill themselves, for whatever reason, will, with the aid of their wives as proxies, buy this insurance, whose initial premiums will be less than the payout, thus guaranteeing a profit to the wife. Because of this unintended consequence, the premiums will rise to adjust, but in the rising, wives whose husbands do not plan suicide will find cheaper policies that explicitly exclude suicide. Eventually the market for wives whose husbands plan to commit suicide shrinks down to the unsubsidized pool, which is economically nonfeasible, which is precisely Hoppe’s point. What is irrelevant is the fact that the wife could send the husband the bill. Why do you think life insurance routinely includes suicide related exclusionary riders?

Your example of an employer and employee is even more irrelevant. No one has written that someone can’t purchase insurance against the actions, intentional or otherwise, of others. That the employer may recoup the cost by reducing the wages of the employee is a non-point since the insurance was purchased by the employer for the employer’s benefit.

As to your contentions with my point about liability insurance, I will restate what I wrote: it is not possible to insure one’s self against the consequence’s of one’s own intentional torts against third parties. You may file such claims once or twice, but once it becomes clear that you are a serial offender, you will be uninsurable without the forced subsidy by the noncriminal, which is Hoppe’s point.

Larry Ruane March 7, 2006 at 7:44 pm

There is a lot of confusion here about Hoppe’s statement that you cannot insure yourself against events over which you have full or partial control. I think Hoppe could have been phrased this better. As D. Saul Weiner has pointed out, you can insure yourself against events for which you can influence the risk. He gave a good example, skydiving. You choose to do that. Likewise, you choose to live in Florida, where the risk of hurricanes is high.

I think the way to look at it is this: you can buy insurance in situations in which you control the probability of the event, but this probability has to be known ahead of time so the premium can reflect the risk and thus your choice. On the other hand, you cannot insure yourself against actually choosing to make the event happen. So you can get fire insurance if you choose to live in a dry forest, but you can’t insure yourself against choosing to set your own house on fire.

Sometimes it is hard to distinguish between accidents and intentional behavior — this is where moral hazard comes in. In a community in which people closely monitor each other, more things can be insured, because it becomes possible to detect moral hazard. This is why the state gets much more intrusive when it tries to “insure” us against health problems.

Tracy SAboe March 7, 2006 at 8:11 pm

For the record, most life insurence companies cover suicide — at long as it’s after 2 years of getting the policy.

I used to sell life insurence.

Now, I don’t know if it’s a regulation or not that pushes this, but it could be argued that while a person doesn’t feel suicidal now, it’s possible the demener would change in the future and this insures in part against that risk.

TRacy

averros March 7, 2006 at 9:33 pm

Suicide or not suicide, Prof. Hoppe presented somewhat simplified view of the relationship between intentionality and insurability.

First, let’s state that *all* risks can be controlled intentionally, to a some degree.

So what the insurance covers is not the risk of the adverse event happening, but rather the risk of the adverse event happening given the expectation of the insured party’s behaviour.

This expectation is based on the insurer’s knowledge of the “facts of life” as well as of the specific circumstances. It also takes into account the moral hazard (and, oppositely, the fact that at least some people have morals).

If follows that someone intending to suicide can insure his life just fine – if the insurer can set premiums (and their frequency) high enough to make it likely to have a profit. I.e. if someone holding a gun to his head asks me to insure him for one million, I’d agree – with premiums of $3000 payable every millisecond, with the expectation that he won’t be able to blow his head away faster than in half-second.

Marwan March 7, 2006 at 9:41 pm

This is a very interesting topic and a good thread.

Well rated life insurance companies have very strict underwriting requirements. They discriminate against moral hazards, behavior with in one’s control and perils, incidents beyond control.

Smokers, Skydivers and diabetics will all get rated by the insurer for indemnification against increased risk.

Suicide is covered after 24 months and MOST people do not want to kill themselves. This is one reason financial records and a credit report are required before you can be underwritten. Also, someone who has a history of psychological problems may not be offered insurance, especially disability income insurance.

Let’s not forget that some people may develop a condition which may prompt suicide after becoming insured. That perosn’s beneficiaries still need the death benefits and the actuaries have worked that into the cost of insurance.

There are some minor flaws in the application of insurance; however, these can be overlooked becuase the piece stands by itself as a sound analysis irrespective of these minor errors.

In a state of true freedom, not only would insurance be far better it becomes far more necessary to manage risk in an uncertain world.

Would that regualtions and licensing disappear, we may end up with far better risk transfer and risk management tools.

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