The Price of Insurance
Iain Murray offers a summary of the government’s entry into the insurance business (subscription required), which practice has appropriately spread like an uncontrolled fire:
[Private fire insurer Nicholas] Barbon did more than promise to defray costs in the event of disaster. He formed a private fire brigade, staffed, as one observer put it, with “watermen and other lusty persons,” to help put out fires. The Fire Office also instituted “fire marks,” identifying insured buildings so that assistance could reach them more quickly in the event of a fire. Interestingly, the British government entered the market shortly afterwards but was unable to compete with Barbon, who persuaded potential customers that the government could not devote the attention necessary to the task.
The impetus for this move, although surely not entirely unrelated to community-mindedness, was financial. It was cheaper to pay firefighters than to pay out claims, and the more fires the company could prevent, the lower the premiums had to be, the more clients could therefore be found, and the better the company could compete. Although some anachronism is required, the notion of private firefighters deployed by an insurance company provides a good example to follow on this explanation, from Murray:
While private insurers estimate the risk of various activities, price it accordingly, and thereby encourage insured parties to carefully consider whether undertaking the activity is worth the cost, government insurance does the opposite: It minimizes losses from engaging in risky activities by taxing less risky ones, encouraging hazardous practices.
Before contracting with a client, a private fire insurer could look at such things as whether the client smokes, what sort of heating system the house uses, and the safety of cooking appliances. A premium adjusted accordingly would signal to the individual and to society at large that there is a cost to actions that can burn down the house — the city. With no direct personal cost associated with public fire protection, and with no fear that coverage could be lost, individuals have no reason to adjust their behavior rather than drive up the widely distributed expense.
We’re about to experience that (even more painfully) with health insurance.