[mitigatedchaos]

@argumate @collapsedsquid

The thing I like about the idea of mandatory safety insurance is that it introduces a new actor with new incentives into the problem.

Let us return to aircraft.

The State has determined that every airline company must carry two million dollars in insurance per passenger per flight, to be paid out in the event that the plane is destroyed and they die.  It has set certain rules, for instance that the insurance company must be sufficiently well-capitalized and it can’t just waive paying out because the company did something stupid.

Executive Todd has plans to reduce the maintenance on Tumblr Airlines aircraft.  He will be at the company for five years.  There is a 90% chance that if he does this, there will be no crash, and he gets a million dollar bonus and leaves.  There is a 10% chance that a plane will crash before he leaves and he’ll only have a personal fortune of ten million dollars and a mansion on Hawaii left, which he can retire to.

So Todd orders that the maintenance should be cut.

However, Blue Hellsite Insurance, Inc., Tumblr Airlines’ insurance company, depends for its funding entirely on carefully calculating risk and then charging a bit more than that, on an ongoing basis.  To do so, as part of their contract (and thanks to provisions passed in law by the State), they can set insurance agents out to inspect processes, planes, and so on.

BHI’s reaction to a plan that results in a 10% chance of a plane crash is “you WHAT?!”  Whereas the risk isn’t necessarily quite so visible or quantified to all others in the organization, or else they may have motivations to ignore it for the same reason as Executive Todd.

So BHI come back and say that either Todd’s plan isn’t going to fly, or the insurance rates are going to go up.

So what was an invisible cost that could have gotten kicked down the road to a successor is transmuted into a stubborn operating cost right now.

Tumblr Airlines makes less profit (upsetting shareholders), raises ticket prices to compensate (thus pricing the risk into the market and making them less competitive), or else doesn’t go through with the plan.

The State could even require that the portion of the cost which is the risk premium is printed on the ticket, informing consumers of roughly how dangerous a given flight is.  This is actually an enormous information gain by consumers, who as non-experts find it very difficult to not only judge airline safety, but obtain inside information about aircraft maintenance procedures.

[mitigatedchaos]

@e8u What about Todd the Insurance Executive?

An astute observation.  I actually left off that part in order to conserve length.

This entire scenario still depends on state intervention, which is why AnCaps and most Right Libertarians will not be in favor of it, even though it loosens the details of regulation to the markets and allows riskier behavior (but just prices it more).

Here’s what the State needs to do to cause this to happen:

• Require mandatory insurance on certain classes of products.
• Determine the rules governing the insurance so that the insurance will actually pay out.  
• For instance, wrongdoing on the part of the airline does not get the insurance company out of paying the insurance.  (It could, however, allow them to pursue damages against the airline without breaking these necessary conditions.)
• Ensure the insurance companies are sufficiently well-capitalized, so that it does not become common practice to make insurance shell companies which immediately fold rather than pay out.  Criminal liability may need to be introduced here.
• Create a court system in which it is reasonably feasible for regular people to actually collect the insurance payout.  (It isn’t necessary that they collect the full payout, just enough that they’re willing to initiate and complete the necessary legal procedures.  Some money could go into an ethical offset fund instead.)

I would say that there have to actually be enough competing insurance companies, but the market will take care of that, since this should be a reasonably profitable field.  And the insurance company itself is a longer-term investment vehicle than the airline, since its practice of distributing risk changes when investors will get paid.

So, the question then is, is a system of competing insurance companies with competing insurance regulations more or less efficient and effective than a system of top-down, politically-driven regulation where government decides the details of regulations?

And that question is an empirical one.  In systems as complex as economies, we can’t just assume the efficient market hypothesis.  After all, this plan is in many ways in response to the existing market distortions of limited liability corporations and destruction of value being easier than creation of value.

Do it right, however, and you can also chip away at information asymmetry - the risk pricing by a moderately profitable insurance company that actually has to pay out if the product is dangerous or defective, as a share of the product’s price, communicates a lot of information that the customer previously often didn’t have.