‘Get Government Out of the Way’ to Solve Insurance Woes

June 4, 2007

Last Friday marked the first day of hurricane season, but the only “storm” guaranteed to be on the horizon is the flawed way government regulators deal with insuring against catastrophes, according to researchers at a Washington, D.C. think tank that advocates lower taxes, fewer regulations and a smaller government.

The group says a fundamental review of risk-management regulation is a top priority for high- risk areas like the Gulf Coast.

Policy makers often criticize insurers for pulling out of these high-risk areas or demanding politically unpalatable (though economically justified) rates for coverage.

The real question is how, if at all, the political process can do a better job?

One response comes from George Pieler and Lawrence Hunter, senior research fellows at the Institute for Policy Innovation (IPI), who say, “The only way to get people the insurance they need, at a price they can manage, is to get government out of the way.”

Right now, Washington and the states share control over insurance, but in a scattershot way. States control prices (rate setting) and dictate coverage, while Washington backstops the industry (e.g. terrorism insurance).

“It’s the ‘genius’ of federalism gone bad: a morass of regulatory constraints, consumer protections, subsidies and guarantees whose only unifying purpose is taking decisions away from the market,” add Pieler and Hunter.

Ultimately, taxpayers foot the bill for misdirected regulatory enthusiasm, which distorts the true risk and the true price needed to cover that risk, while sharing the risk with private property owners generally — socializing it, as taxes do. By severing the link between price and risk, government converts individual coverage from pooled-and-priced risk into a universal defined (contingent) benefit paid out by a tax-funded pool.

“When risk-management services are treated like a public utility, chopped up by preemption, mandates, multi-layered regulatory micromanagement, and populist grandstanding, they can’t make viable business plans for the modern economy,” note the experts.

The unpredictability of a storm is no match for the predictability of bad government.

The Institute for Policy Innovation is a national think tank with offices in Washington, D.C. and Dallas, Tex.

Source: Institute for Policy Innovation

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