Insurance is Capitalism's great self-regulator

Insurance prices negative externalities better than governments ever do.

Pricing negative externalities

One of the key issues in a Capitalist society is pricing externalities. When they go improperly priced, humanity suffers.

Externalities are side effects of actions: 

• Negative: burning coal creates pollution, pollution negatively affects people’s health. Carbon emissions created by burning fossil fuels warms the planet which negatively affects many things humans need to survive.
• Positive: replacing aging buildings has the side effect of making a neighborhood more desirable and therefore increasing the value of everyone’s property and business in the area.

Groups that cause these issues often do not pay the price of their actions, which means most often they continue causing problems because there's no incentive to stop.

Some will altruistically try to stop causing harm, but they'll have higher costs than the alternative because it's cheaper to keep doing the bad behavior. If it was cheaper to not do harm, they wouldn't do the harm.

Artificially adding a price for that externality is a way to make bad behavior unprofitable, so corporations change their behavior naturally and without a ban or additional regulation.

Setting the proper price is a hard problem, because we’re not omniscient and the world is complicated.

The state sucks at pricing externalities: Pricing carbon

Climate change is very real, it’s human caused, and it will have large negative consequences for humanity as time goes on.

Climate obsessed folks overstate the speed and ferocity of the downsides, and who contributes the most, but they’re not wrong that eventually the world will have a hard time supporting billions of humans without significant retooling.

One way to incentivize corporations to deploy the versions of technologies and systems that won’t cause climate change is to put a price on carbon. Essentially a fine/tax for each ton of carbon your business directly emits.

This makes operations like coal plants much more expensive to run, and therefore less profitable.

In comparison solar panels will have less of a carbon tax on them so they may be more profitable in comparison under this carbon pricing regime.

No other intervention is necessary, the free market will compete and create solutions based on the new reality of costs. It's even commonly proposed to give the revenue from the tax back to people as an income tax break, meaning it has no net cost to the average citizen at the end of the day.

The issue is that politics always gets in the way of properly pricing carbon. Our understanding changes so the price should change. In most cases it’s politically impossible to get a price above 0.

The story is the same for pollution, etc. Corporations are resistant to state-imposed taxes and fines that eat into their profits.

Enter insurance

Insurance companies don’t give a shit about politics and narratives. They care about probabilities and costs. 

If they ignore reality, reality puts them out of business. (i.e. Their payouts will exceed premiums and they will go bankrupt)

The whole business of insurance is pricing the cost of bad things that may happen in the future and spreading that the risk around to all premium payers. That way we get the lowest cost protection against those bad outcomes.

Insurance is incredibly expensive if you’re insuring something that’s very expensive that’s very likely to be destroyed or stolen.

Insurance is cheaper when you’re insuring something that’s cheap to replace or is very unlikely to be destroyed or stolen.

You can often take action to reduce your insurance premiums by making the negative outcome less likely: installing security cameras, moving to a place less likely to burn down, etc. But security theater or virtue signaling won't bring your premiums down, only what has been proven to work will help you save money.

Property insurance adds a price for bad policing

Property insurance covers damage or theft of property. Often you can your property insurance premiums by installing security systems and fire suppression systems.

These changes add a cost. Some of that cost is because of chance, but a good portion is due to bad actors being able to commit crimes (arson, theft, etc). Better policing would solve a lot of this.

But at the end of the day insurance is going to accurately price the cost (including the costs due to bad policing), no debates about politics needed.

Worker’s compensation insurance improves worker conditions

Worker's Compensation Insurance covers when workers are injured in the workplace. So you can often reduce your premiums by implementing better safety systems (anti-slipping surfaces, clearly marked danger zones, better training, etc).

They are effectively pricing the cost of workplace safety oversights. Insurance, in this case, is improving worker conditions by making it more profitable to build safety into the workplace.

Health Insurance pricing pollution and bad nutrition

Health insurance is an interesting beast because there aren't programs to reduce your premiums for living health or living in a place that's healthier (better air, water, food, etc).

Health insurance is essentially the catch-all pricing mechanism for most of what negatively affects humans: unhealthy or contaminated food, polluted air, polluted water, microplastics, etc.

And premiums are wayyyyy up. This is due to the cost of care going up, as well as the amount of care needed going up.

Luckily health insurance companies are mandated legally to spend a vast majority of their premiums on healthcare. If the cost of healthcare went down, health insurance would go down in cost.

A good program would be some way to reduce your premiums by taking actions that benefit your health, or sending in your biomarkers every year to get your rates adjusted based on your health.

Reducing the cost of health insurance would also require removing heavy metals from consumer products, improving air and water quality, improving nutrition, removing the harmful chemicals we use as pesticides, etc.

The incentive for change is there, even if the people bearing the cost aren't the ones causing most of the issues.

Insurance pricing carbon

Fire, flood, home insurance put a price on the effects of climate change. 

Fire insurance for my grandmother has more than tripled because she lives in a neighborhood next to a forest in Northern California.

Flood insurance takes into account where your property is and the likelihood of flood damage there. 

As insurance company recalculates probabilities for these disasters based on the latest understanding of climate science, and then they adjust premiums. This is as impartial of a up-to-date pricing of the externalities of carbon emissions as we're likely to get.

These insurance programs are just a carbon tax with extra steps.

Again, these costs create demand for change to address climate change. Even if the payers are not the cause.

Incentivizing fixing shit

These are a few examples, but insurance is the great opt-in mechanism that incentivizes necessary change. No state intervention necessary.

Some situations you have 100% agency to fix your own bad behavior (installing fire suppression systems in a building to reduce fire insurance costs).

But insurance premiums going up due to climate change, or pollution still require collective action. What’s nice is that the incentive is there whether people believe in the cause or not.

Reframing the debate on how to bring insurance costs down

The key issue still remains tying incentive for change to the people who can affect the change.

Usually that's best when the group causing the problem bears the costs directly. In this case, it's not so easy, but it's much easier because the costs are being borne.

Anytime someone complains about the cost of insurance, the discussion must be redirected towards the cause of the payout amounts rising:

The cost of health insurance is going up because we're eating poisonous food, breathing dirty air, drinking contaminated water, pharmaceuticals do more harm than good, and there's very little competition in healthcare. Addressing these will bring down healthcare costs.

The cost of fire insurance is going up because the risk is fire is increasing. Let's take action to make that less likely.

And so on. Instead of blaming the insurance company, we must educate people that the cost of coverage is going up because the cost of payouts are going up.

Limited state involvement

Governments suck at pricing externalities and even worse at dictating the actions needed to reduce harm in a cost effective way.

Insurance can price the externality more accurately and precisely, and the market will figure out the cost effective solution if the cost is added to the action causing the problem.

The best thing the state can do to incentivize good change is to mandate corporations and people are liable the their bad behavior: if you don't have good workplace safety systems then you're liable for the costs incurred from injuries, etc.

We must also turn all conversations about insurance costs going up to the things causing the probabilities and costs of bad outcomes going up.

It is much more effective for the state to have this light touch than to wade into controversial debates and implement heavy handed, ineffective regulation.