For most people not in the insurance industry, insurance is typically referred to as the “i” word. Some even have a seven letter, two word, introduction to it as well… Despite the bad rap, the reality is that insurance plays a vital role in the realm of capitalism and free markets.
In fact, in a marketplace without the insurance mechanism the cost of virtually everything would be dramatically higher and many transactions would take far longer, if ever, to settle. We would experience more law suits, more attorney’s fees, and the degree of uncertainty about settlement of transactions would be substantially higher. In fact, some transactions simply could not take place without an insurance mechanism.
But there is a profound difference between a free market in insurance and what we have today. Moreover, with news hitting you squarely in the face about insurance conglomerates being bailed out (AIG) it should not be surprising that insurance and insurers are being viewed dimly.
But who really is at fault here? Is it the fundamentals of insurance that led AIG into a black hole? The answers to those questions, and more, are generally covered by Hans Herman Hoppe in a great article he wrote not all that long ago out at Mises.org.
One of the primary requirements, as Hoppe brilliantly illustrates, is distinquishing what is insurable verses that which is uninsurable – and it is not always simple. Moreover, government has taken it upon itself to force insurance companies by law to cover what would otherwise be uninsurable. As a result of forcing insurers to act irrationally, it ought not be surprising to look around and discover that much of the insurance world mis-characterized all too often as “heathcare” makes little sense…
Hoppe clearly illustrates the folly of health insurance as a general proposition, but clearly one gleans from this piece by Hoppe (although he doesn’t state it) that a large deductible HSA style system would be profoundly rational, consistent with human action, and in concert with the proper role of insurance in a free market system.
This is an excellent piece…
Now take the example of unemployment. As you know, there is something called “unemployment insurance.” In the modern world we have invented the art of misnaming things, of applying terms that are completely inappropriate and then trying to fool people into believing that by changing the words, we have changed the nature of things.
Unemployment is an uninsurable risk. I have full control over being employed or not being employed. All I have to do is tell my boss what I really think of him and I will soon be unemployed. On the other hand, 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. So obviously this is not a risk that is insurable. It falls into the realm of individual responsibility……..
With respect to doctors, a similar situation has been put in place. We have basically outlawed all Chevy doctors who focus on the less expensive minor health problems (which is, in fact, all that most people have) and are forced instead to use Mercedes doctors who charge Mercedes prices even for ailments that can be fixed by people with significantly less training.