Socializing risk

Probably the biggest single reason why our homes, cars and lives are safer than those of our parents is the insurance industry. It is a subtle but persistent pressure to improve. Insurance firms assess risk and give choices that cost more or less. A safer car or home gives you lower rates. Some types of behavior are so risky that few people can afford to do them; at least they cannot get insurance for it. We don’t often perceive the benefit. Maybe that is why we are running the risk of losing it.

It is human nature - and a good impulse - to try to help those in need, especially when they are stricken by some big disaster. It seem really heartless to be on the other side. But in the long run, it makes sense to be a little heartless and probably saves lives when we force people to take responsibility for their risky choices.

Insurance is designed to spread risk. Insurance firms seeking lower payouts encourage less risky behaviors. This is a win-win. Unless there is some dishonesty involved, you are better off if your house doesn't burn down than you would be if your house burned down and you collected the insurance. The insurance company is also better off if they don't have to pay. The balance comes with assessment of risk.

Some activities can get cheap insurance because insurance firms don't expect to have to pay out. Others cost a lot because risk are greater. You can buy insurance for any level of risk, but if the risk approaches a certainty you will have to pay more for the insurance than you would lose. This is where the dishonesty comes in.

A good example comes from people living on places like barrier islands or flood plains. Over the course of a few years, these people are almost certain to lose their homes or have them heavily damaged. They CAN get private insurance, but not at a price they are willing or able to pay. That should tell you something. Maybe don't live there. But these people cry to government and get "relief". This encourages stupid behavior.

It is not heroic to rebuild two or three times. Maybe nature is trying to tell you something.

I think we need to figure the risks. Some disasters are unpredictable. The most extreme case would be a meteor strike. You cannot anticipate this or insure against it. A tornado is similar in some ways. We cannot evacuate all the Midwest, although it would be a good idea to change building codes. People who live on flood plains are asking for trouble, as are many in hurricane prone areas. The bottom line is that we should expect everyone to get private insurance for their risks.

But whenever there is a big disaster emotion takes over.

I watched the news with the recent tornado. One of the guys featured planned to rebuild his house. His business. He said he was "lucky" that he had full insurance. He was not lucky; he was smart. Kudos. He paid more over the past five or ten years. What about those who refused to do this? We want to be generous, but do we encourage risk? Does our generosity enable less intelligent choices? What about the person builds his home on a flood plain because he figures he will get bailed out? If he is killed in a flood, is it not our generosity that killed him?

It is even worse than that. Natural disasters are not equal opportunity destroyers. In most cases, victims of natural disasters have built or behaved in way that is harmful to the environment. If you house slides down with a mudslide, your behavior contributed to the destruction of that hillside. If your house is flooded, your behavior polluted the water and interfered with drainage. If your house is destroyed by a wild fire, you probably have interfered with the natural fire cycle. There are reasons not to do these things & the most effective way to get people not to do thing is to make them pay.

Posted by Christine & John at May 27, 2013 10:25 PM
Comment #366672

Other than personal property, I don’t think insurance costs are a driver of the amount of risk accepted. It’s lawyers, legal risk, and the perception thereof. Unfortunately.

Posted by: Schwamp at May 28, 2013 4:15 PM
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