Insurance, risks, and risky behavior / by kevin murray

Most Americans have become normalized towards insurance, not only because mandated insurance is required, for instance, for healthcare, automobiles, and homes; but because society as a rule has bought into the belief that managing risk is prudent and in order to do so, they are willing to pay a premium to a licensed party so that an unanticipated catastrophic affair, should it occur, will not financially devastate them.


On the surface, the above makes sense, as people, pay premiums to obtain insurance so as to protect themselves in case of an adverse life event.  However, having insurance in and of itself, just as in the simple observation of a particular phenomenon in physics or similar, can change the nature of that phenomenon, by virtue of it so being view, or in the case of insurance, by virtue of that insurance so being issued.  So that, it is logical to believe, that the reason that more and more homes are being built within flood zones, is because the buyers of those homes, are able to obtain insurance; but not only that, in many cases, the insurers themselves, when they are explicitly or implicitly backed by government agencies, adjust to that meaningful fact.  This would seem to strongly imply that people, companies, and insurers are more willing to engage in risky behavior, if, at the end of the day, they believe that they will be covered by some other entity that will actually bear the real cost.


This signifies, for instance, that insurance companies, that have their bonus and profit incentives misaligned, may find themselves being subtly or not so subtly encouraged to take on riskier insurance policies, in order to receive those higher premiums, and to therefore meet bonus and profit objectives, because they believe that at the end of the day, if things actually go amiss, that they will be bailed out by a third party or a governmental agency.


Additionally, people are more likely to engage in riskier behavior, if by engaging in such, they are safeguarded in their decisions, by having healthcare or automobile insurance that will protect them from having to suffer the full effects of those riskier decisions.  That is to say, those that are lacking insurance are going to, if they are prudent and sensible, be more careful about what they actually do, knowing that they don't have a safety net to cover them from a very bad fall.


The biggest problem with insurance and risks, is that some sophisticated companies have made it their policy to game the system, so that, they purposefully take risks, including specifically risks that are short sighted and imprudent, knowing that or believing that when those risks go horribly wrong, that they will be backed by governmental agencies that will thereby declare they these corporations are "too big to fail" or too vital to the nation or some other dubious reason, which allows these companies to thereby benefit greatly on the people's dime, but never suffer the fair consequences of paying the full price for their gambles gone horribly wrong.


The concept of insurance, in which pools of money from individual premiums are utilized to take care of paying a given legitimate claim is a sound one; but when some of the players within that game, are able to engage in unnecessary risks, when they should be actually reducing or properly classifying risks, will invariably lead to bad outcomes, of which the availability of that insurance, itself, has led to riskier behavior.