A pragmatic, free-market take on insurance related issues from R Street Institute’s Eli Lehrer.
A one-time boss of mine—a bearded gentleman who liked cigars, opera, candy and the Austrian School of economics—used to insist to me that the private sector would insure everything under the sun, if only the government would get out of the way, abolish all regulations and stop setting prices. As such, he favored not only the elimination of rate regulation, residual markets and the flood insurance program – all things I also favor – but also the entire apparatus of government-run solvency and form regulation.
Oh, and all insurance guarantee funds, too. In short, everything.
When he’d discuss these thoughts with people in the industry or lecture about them before college classes taught by similarly inclined professors, he’d get nods of approval and even an occasional “amen.” And the theory is certainly attractive. In wealthy societies, it seems quite plausible that risk management could work pretty well without the government, and what insurance company’s executives wouldn’t, at least at first, jump for joy if they found that their enterprise would be forever of all rate filings, form filings, market conduct examinations and other demands the government places on them?
But as I’ve grown older, hopefully wiser, and perhaps more cynical, I’ve come to believe my former boss’ utopian vision of a regulation-free insurance world answers a question that nobody has asked and, indeed, may not even be worth asking. In the real world, insurance markets are regulated, and probably need to be, to some degree.
Could insurance sales take place in utmost good faith in a world without form regulation? Would the standard annual or semi-annual contracts that are nearly universal in the auto and homeowners’ insurance markets exist if each contract had to be negotiated individually? Without solvency regulation, what would stop homeowners insurers in catastrophe-prone areas from being even less secure than they already are? I do believe that there are market solutions for almost everything and, as such, I think these questions would be answered in time. But the market that would emerge would be quite a bit different from what we have now.
If insurance contracts for ordinary homes were sold without form regulation, people would have to negotiate a lot more. This would make it more attractive for everyone to look at longer-term agreements, and the short-term insurance contracts that most people now have would cease to exist. Without guarantee funds or solvency regulation, likewise, insurer reputations would become even more significant because of the very real chance of not getting paid. And so forth.
Some products might not exist at all: a family deciding to move to a beach house in a hurricane-prone area, but not sure how long they would stay, for might decide that savings or maybe something that doesn’t now exist—say, an individual cat bond—would meet their needs better than an insurance policy.
These are interesting and even intriguing thought experiments. Most of them are already possible, in the excess and surplus lines market. But whatever their merits, they represent fundamental changes in what is being sold and offered, and not always for the better. Besides an abstract increase in freedom, for example, what’s the advantage to anybody except fraudsters of ditching solvency regulation? The fact is that the current admitted market insurance system meets the needs of most people in most places decently. If the regulation were done away with, the types of products available might be broader than now exist. Some people might be better served. But the very things that now exist and the fundamental business models of the companies that sell them would have to be quite a bit different.
Since the admitted market wouldn’t exist any longer, by definition, admitted market insurance wouldn’t exist either. No consumer, no business, and no prominent political leader actually wants this to happen. Whatever its abstract merits, getting rid of all insurance regulation is a dead letter.
If people who want freedom and free markets like to have a real effect on public policy, they need to work within the system and work to improve what exists rather than pursue an unrealistic, if nonetheless alluring vision.