Insurance Versus Taxes

You can make the argument that insurance made the modern world possible, because it made risk quantifiable. The insurer is making a bet that the return on his investment of your premiums will exceed the claims on those premiums. In order to make that bet, he has to have some way to calculate the amount he can reasonably expect to payout in claims.

That’s one half of the equation. The other half is the investment. In order to run a profitable insurance company, you have to invest conservatively. The same guys figuring out the probability of your death this year are using the same mathematical skills to find the safest investments. The result is large pools of premiums moving into the safe investments like bonds. [1]

Niall Ferguson in the Ascent of Money gives a great history of the first modern insurance company, the Scottish Ministers Widow’s Fund. Robert Wallace and Alexander Webster figured out a few things that revolutionized capital. One of the consequences of this innovation was that large pools of capital were created from thousands of small premiums. That capital could then be put to work in new businesses, new industries and new technology.

The interesting thing about the birth of modern insurance is even after centuries of experience, we still can’t understand the difference between insurance and taxation. Social welfare programs, for example, work on the principle of pay-as-you go where current taxpayers cover the expenses of current beneficiaries. Back when the Scots were inventing modern actuarial tables, they knew pay-as-you-go could never work in the long run. Yet, here we are.

It’s also why the public sector pension systems are teetering on collapse. The Scotts figured out that a fixed benefit system had to lock in the benefit side by pegging it to the amount of premiums paid into the system. Once you uncouple the premium from the benefit, the system will collapse. The only question is how long it will take, but the boundary always seems to be one working life, as we are seeing in America.

Similarly, insurance only works when it is voluntary. When the state comes in, points a gun at your head and says you have to buy an insurance policy from the companies they choose or from the state, that’s not insurance. That’s extortion. If you want to be kind, it is a tax. When the state takes money from citizens against their will, that’s a tax, regardless of the intentions.

It’s why American health insurance is collapsing. It has none of the features one must have for a successful insurance system. The insurers are forced to take all customers, regardless of risk. They are not allowed to dump reckless customers or even ask about risky behavior. At the same time, the customers are forced to buy insurance. In many areas, there’s only one or two companies and the rates are set by the state.

Of course, what makes health insurance an impossibility is we will all get sick and die eventually. You cannot insure against certainty. A true health insurance system would combine the logic of whole life insurance to cover the inevitable with the logic of term life insurance to address surprises, like getting hit by a bus. Again, these are things we have known for centuries.

Progressives are now talking about using the same nutty ideas to “remedy” gun violence in America. They want gun owners to carry liability insurance that would pay victims in the event the insured’s gun is used in a crime. No insurance company would sell a policy to a gun owner to cover the cost of them shooting someone. There’s simply no way to shoot someone without being negligent (criminally or civilly) or justified. In both cases, insurance has no role.

The point of this, of course, is to drive up the cost of gun ownership and create a gun registry, but even if it was an honest effort, the gun owner is being held liable for the actions of others. That’s just a click away from collective punishment and contrary to a couple thousand years of western civilization. More important, it is confusing insurance with taxation. In this case, taxing millions of gun owners so politicians can hand out tax dollars to the victims of gangbangers.

All of this brings me to something Steve Sailer has been pushing with regards to immigration and that is forcing immigrants to carry liability insurance. Unlike compulsory gun insurance, the attempt here is not to infringe on a natural right. Steve is cleverly trying to introduce the idea in order to help immigration opponents. In that regard, it is clever and I hope it catches on with the chattering skulls.

The problem here is similar to the other examples of compulsory insurance. It’s really just a tax. We already have a sponsor system where people can bring over relatives and employees, as long as they meet certain financial terms. Sponsors cannot be on welfare, for example. They have to have an income higher than the current poverty line.

Where the insurance should come into play is on the sponsor and employer. If Jose wants to bring his family over, he has to either get a liability policy with a million dollar combined single limit or post assets of the equivalent. Employers seeking H1 visas would do something similar. If Jose gets rich and wants to sponsor his relatives, Jose has to carry enough insurance to cover it. Similarly, the employer will have to factor insurance costs into their indentured servant costs.

[1] I know. I know.

9 thoughts on “Insurance Versus Taxes

  1. “Of course, what makes health insurance an impossibility is we will all get sick and die eventually.”

    I’d disagree with that. The real problem with health insurance is the inability to define what “health” really means in an actuarial sense.

    Life insurance works because death is an objective condition. Norwegian blue parrots aside, that is. And it is generally easy to diagnose and understand the proximate causes of death. So, life insurance risk can be understood and managed using actuarial science.

    Health is different. There are two types of health dysfunction: injury, and illness. Injury is similar to death, in that it can be easily and objectively diagnosed (frequently without any medical expertise whatsoever), and the proximate causes are easy to identify and understand. Furthermore, the costs associated with treating injuries are pretty easily defined. Consequently, you can apply actuarial science to injury, and you can insure against it. People instinctively know this; you buy a catastrophic health insurance plan in order to insure against “getting hit by a bus”, and in that sense, you can get real value for what you pay for.

    Illness, on the other hand, presents tremendous problems. Diagnosis of illness is anything but easy. Any idiot can diagnose a compound fracture of the leg; diagnosing many (if not most) illnesses is an expensive and unpredictable process. What’s worse is that even when an illness is properly diagnosed, many illnesses have many different treatments that must be subjectively determined and evaluated– and all of these different treatments have different cost profiles. And, we have an incredibly poor understanding of what the proximate causes of many illnesses actually are; complicating matters even further, some illnesses are brought on by undiagnosed underlying conditions that are all but impossible to predict or even define.

    The result of all this uncertainty means that applying actuarial science to illness is hopeless. If you can’t define the risk, much less manage it, running an insurance business against that risk is folly.

  2. The most pernicious aspect of politicians’ substitution of “insurance” for what we used to call government is their unrelenting pursuit of ever larger pools of consumers to foot the mislaid premiums.

    The urge to expand “the pool” surges in direct proportion to the insurers’ inability to book returns on the premiums. Thus, when Social Security becomes insolvent, they increase the pool. When Medicare/Medicaid show a loss, they increase the pool. And, one day, when the government chokes on its red-ink, as it is doing right now, the political class can only “increase the pool.”

    What that means, essentially, is they’ll need to spread the risk to people living outside the government’s jurisdiction, like, to people in far flung places like Mali, Indonesia or Morroco to tidy up their ledgers.

    Could it be then, that our elite’s yen for transnationalism and one world government indicates that they have so badly invested the premiums (ie. taxes) that we citizens have entrusted to them that the only option available to them that will (1) stave off the system’s collapse one more generation AND (2) thwart their being held to account for their mal-investment is the corrupt United Nations and a global taxing authority?

    I think that’s the nub of it. Carbon taxes anyone?

    Telling, isn’t it?

    • And yes, let us tear down those borders everywhere and let the horde find it’s own equilibrium and there is your easily controlled pool expansion. Nicely done.

  3. Insurance premium investment?
    Gosh, what happens to all the (mandatory) recurring premiums that NEVER pay out, according to approved actuarial table claims?
    Sure seems fuzzy between banking laws, Insurance laws, and investment laws.
    Why are THOSE law books so thick?

  4. To your broader point, I think it’s worse than you think. Much of the population simply doesn’t understand the principle of insurance. At. All.

  5. The liability would presumably be for negligent carrying or storage that permitted someone to obtain your gun. The interesting part about that insurance demand would be cases like a concealed carrier getting into a struggle with an attacker where the attacker was able to take the gun. You’d then be legally liable for a potential string of crimes all because you lost a street fight?

  6. You’re in error when you say insurance has no role when you shoot somebody. The legal fees you will incur in a perfectly justifiable shooting with no criminal charge nor civil suit filed can easily hit five figures.

    There are insurance companies today that sell policies that cover your negligence, your legal fees defending a civil suit, and your legal fees defending criminal charges if you are acquitted.

    You’re correct of course about the real agenda behind creating this requirement.

  7. I like the idea of any “illegal” or immigrant looking to fast track it, to pay insurance. Question is, who is holding the $$ and who will be paying out when inevitably, things go awry. More tort!

Comments are closed.