This article was published in the Autumn 1994 issue of Formulations
by the Free Nation Foundation
Contra Insurance
by Bobby Yates Emory
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A diversion for morality
Current insurance overpriced
-Risk can be evaluated
-Prices exceed value
-Prices must exceed actuarial cost
-Reason for concern
But - Values are subjective
Proposals are for speculative uses of insurance
-FNF proposals are speculations on future solutions
-Not an endorsement
Insurance may be less overpriced than government
-Government services routinely overpriced
-Insurance still a better buy than government
-Insurance morally preferable to government
-Bottom line

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A diversion for morality

I would feel bad if I implicitly endorsed a product about which I have serious reservations. (A forum discussing insurance as a vehicle for security in a libertarian society raises questions about whether we are endorsing a product to which there could be objection.) Such is the case with most insurance products available today.

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Current insurance overpriced

Risk can be evaluated

Most risks that are covered by insurance policies can be evaluated on an actuarial basis to determine the cost of bearing the risk. For example, if a vehicle is worth $10,000 and the risk of it being stolen in a year is 1 in 1,000, the actuarial cost of this risk is $10. Actuarial studies are not trivial and often require the processing of large data files and the exercise of professional judgment but there are people who can answer these questions.

Prices exceed value

When we compare the price charged (the premium) to the value received (the actuarial cost) we find that the price is usually at least double the cost. One example is airline travel insurance. Many credit card issuers now provide accident coverage if the credit card holder uses the card to buy a scheduled airline ticket. In their accounting systems they allow 17 to 20 cents for the actuarial cost of providing $150,000 coverage. To buy equivalent coverage at the airport costs $5.00.

Prices must exceed actuarial cost

The reason price usually exceeds the actuarial cost is: for the insurance company to remain in business it must cover all its costs and make a profit. The company must pay salesmen, record keepers, taxes, office space, a multitude of other costs and pay claims to its policy holders. After meeting all these costs, it must make a return for its stockholders.

Reason for concern

So the reason for concern is: Insurance premiums usually greatly exceed the actuarial costs of the risk to the consumer.

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But Values are subjective

Austrian economics teaches us that all values are subjective. Knowing the real cost of production of any good or service does not tell us what it will be worth to any individual. Only that person can judge what it will be worth to them. One example, of many possible, is to consider a travelling salesman's need for auto theft insurance. If a salesman's job is dependent on his vehicle, he has no monetary reserves, and auto theft insurance is a small fraction of his income; his individual subjective valuation of insurance may place a much higher valuation on the insurance than the actuarial risk cost.

If a purchaser in the free market, whose access to information is not prevented by force, wishes to make a purchase at a price higher than someone else deems proper, the purchaser should be free to do so.

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Proposals are for speculative uses of insurance

FNF proposals are speculations on future solutions

These proposals are intended to stimulate thinking and discussion about the perplexing problem of how, in the future, we might provide what some economists have chosen to call public goods. Goods and services are only valued because they benefit individuals. We have been challenged by the public goods categorization to propose a method for paying for goods in which most people in a society share the benefit and thereby have (supposedly) no incentive to pay to have the good or service produced.

Not an endorsement

Any proposal or speculation we formulate is in no way an endorsement of any currently available insurance policy.

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Insurance may be less overpriced than government

Government services routinely overpriced

We are well aware that most of the services provided by government are usually overpriced if we add to the user fee, if any, the cost of subsidies. When fire protection services are provided by private companies the cost is usually one fifth the government cost.

Insurance still a better buy than government

Even if we conclude that using insurance to provide a good or service will cost citizens at least double the actuarial risk cost, insurance may still have a significant cost advantage over government. We might improve our overall efficiency if we shifted from government to insurance.

Insurance morally preferable to government

Insurance provided by private means does not entail the use of force. Government almost always involves the use of force (if it didn't we probably would argue that it is not really a government). So even if the cost of insurance is higher, we would still find it preferable since it does not have to involve the use of force.

Bottom line

Even though there may be concerns about endorsing current insurance policies, advocating insurance as part of a future method to deliver goods or services may be preferable to advocating government. D

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Bobby Yates Emory of Raleigh, North Carolina, has worked a career as a programmer and systems analyst at IBM. A longtime libertarian activist, he has run for offices from County Commissioner to U.S. Senator, and held political party offices from Precinct Chairman to Regional Representative to the National Committee.