By: Robert Arvanitis

Robert Arvanitis — Sat, 27 Apr 2013 14:46:03 +0000

Insurance is, (or at least began) as a way to amortize rare, fortuitous events.
Along with protection came unfortunate feedback, called moral hazard and morale effects. “Who cares, it’s insured…”
These issues insurers handled with risk ratings; Oily rags in the basement cost more.
But starting in the late 1970s, insurers pushed deeper into inappropriate bets, taking on what are properly business or operating risks.
Two bad things have come of this. First, actuarial methods demands randomness and cannot price these risks. Second and more poignant, such “insurance” in fact creates risk where there was none before.
Case in point — Directors and Officers insurance (D&O). AIG pioneered this product, actually creating the need ahead of selling it, with a picture of a duck in a leather Chesterfield “director’s” chair. “Are you a sitting duck?” asked the ad.
Once law suits began in earnest, stimulated by the new prospects of deep pockets, AIG even more cleverly moved on to new versions and left copycat competitors to sell into the storm.
So too with medical malpractice. Of course we must be able to police practitioners. But there are far more effective ways to allocate social costs of “cure 1,000, harm one…”
Going bare strips incentive from the plaintiffs bare. “Ok, the clinic’s yours. We’ll be across the street if you need us.”

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By: Robert Arvanitis