Tuesday, October 31, 2006

The "Moral Hazard" of Government Insurance

More is more

There is a proposal now for the US government to back "terrorism" insurance issued by private insurers. Government bails out insurers, or directly provides insurance in the form of rebuilding funds, for those who wish to live in natural disaster-prone areas: eg the nice places to live, along rivers, oceans, beaches, New Orleans even.

People who choose to live in these places dont have to pay the full expected costs of living in these places, their costs are subsidized by you and me. If a hurricane destroys a home, the government steps in and pays the owner. This means the owner doesnt have the incentive to think twice about the safety of their beautiful spot on the beach (reverse wealth re-distribution anyone..but come to think about arent all government programs to some degree reverse wealth redistribution?). Nor do they have to think twice about maintenance of their places etc.

Terrorism insurance might be a different story. Eg the government (and our interventions overseas - Jefferson's "entangling alliances") is the reason those intervened against might want to attack us at home, so why should not the government step in to cover these self-same risks? The answer might be, again, is that the potentional terrorism targets are again the most ideal locations in our humble country, so again, the government insurance acts as a moral hazard for the wealthy. Plus if we are covered for terrorism where is the check on government power that creates this terrorism?

Only State Farm of the major insurance companies supports this government-backed terrorism insurance fund. The the industry association is out against it; Good for them. Maybe its just not worth the paperwork and it is just plain bad.