Insurance or Not, in the End, Who Pays?

by Fred Copley

When catastrophe strikes, we expect government to do what it can to protect life and property. But beyond this immediate aid, what responsibility should citizens bear for their own losses? How much should society pay, for example, for people who choose to live or work in risky locations?

Katrina was an exception. Most of the damage was due not to the storm itself but to the failure of a civil structure: an adequate levee system. And subsequently, the failure to evacuate properly, to oversee aid to the area, and to maintain law and order. No one could persuasively argue that homeowners are responsible for the government’s failure in its most basic job. Nobody yet has suggested that homeowners buy government-dropped-the-ball insurance, although, all things considered, it may not be a bad idea.

Acts of Nature and God are different matters. While one may reasonably expect governments to hold up their end of the social contract, nature makes no promises and is not bound by public opinion. In natural disasters—whether sudden catastrophes such as hurricanes or slower phenomena such as drought and global warming—nobody is liable for the destruction except the person who gets in its way. The government helps out with immediate disaster relief, but the individual carries the burden of property loss.  The property owner therefore wisely buys insurance against such eventualities.

What about those who cannot obtain insurance because insurance companies decide the risk is too great and refuse to offer coverage?  This decision has as much to do with insurance companies’ need to make money as it does with the likelihood of disaster.  In these cases, governments step in with insurance programs of last resort. Such programs are required to offer coverage to people who cannot get it—although not necessarily at a low rate.  Other programs help people decrease their vulnerability to natural disasters.

Moralists may argue that everyone should cope with their own risks without such interference from the government, but would they feel the same way about people whose pre-existing conditions prevent them from buying health insurance?  Are the two situations all that different?  We don’t always have a choice about the state of our body or the location of our home, and in both cases we often lack the right information. 

Fairness aside, is it good public policy for populations to live without insurance? Insurance of last resort programs enable people to pay for their own security. In some cases, without such initiatives, the government would eventually pay to help people who have lost homes and livelihoods.

One may indeed celebrate the market’s power to prevent people from living in risky places. There is something to this, of course, because we suffer just as much from someone else’s bad decisions as from their bad luck. But how much of our way of life would we alter in order to manage risks? There are lots of risky places in America. Should insurance companies alone make the decision about which risks are worth taking? 

By abandoning such decisions to the market and our fellow citizens to their fates, we also deny ourselves a say about the kind of society we want to live in. By recognizing that natural disasters have effects that reach all of us, and by finding ways of addressing those effects through government, we find our own power as citizens. This involves our taking a share of others’ risks, perhaps by paying tax dollars into a government program, but it also allows others a chance to weather disaster, rather than be crushed beneath it.

(Image of 1956 Metropolitan Insurance pamphet from flickr.)

Comments

[captive insurance]

Taking a share of other people's risks isn't exactly a widespread belief. People care less and less about others these days, and it shows. After all, most would rather let others be crushed by disaster than risk it themselves.