Chapter Overview: 23

Insurance

“Insurance is one of the great inventions of all time.
It compares in importance with the invention of the wheel.” —Andrew J. Galambos

Insurance is one of the most important social institutions ever created by human beings. It is also a social tool that can be expanded to provide far better than the political state all the functions that people commonly believe are uniquely suitable only to a political state. These include protection of life and all other forms of property from criminal attack, both domestic and foreign; and protection from losses due to exceptionally destructive natural phenomena.

The invention of insurance compares in importance with the invention of the wheel because insurance is the most effective way to prevent loss and thereby protect property. Loss prevention is an already existing and emerging element of virtually every form of insurance. However, if a loss does occur, insurance will compensate for the associated financial damages.

At the outset we acknowledge that despite the fact that insurance has been a valuable development in human society, the insurance industry in general has suffered from a less than stellar reputation. It is true that some insurance companies have engaged in unethical behavior such as denying claims they think are questionable rather than submitting the validity of the claim to immediate arbitration; stalling on payment of claims to hold onto the money longer; or refusing to settle all tort claims against an insured and forcing the case to trial. However, this sort of conduct is not true of most companies.

Where this does occur, the solution is the credit mechanism, discussed at length in the prior chapter. The credit mechanism would publicize and expose unethical conduct by an insurer, thereby disincentivizing insurance companies from engaging in unethical business practices.

The concept of insurance

Insurance is a contract by an insurer to assume specified risks of loss of the insured and to pay a contractually specified amount for losses that occur. Insurance evolved in human society as a way of sharing losses that would be catastrophic for an individual, but are not catastrophic if the risk is shared with a group of people. The whole group bears without great difficulty all the single losses which might otherwise be crushing blows to individuals.

Spontaneous human development of insurance

Portions of the Code of Hammurabi on a clay tablet, on display at the Louvre in Paris.

Portions of the Code of Hammurabi on a clay tablet, on display at the Louvre in Paris.

Insurance evolved gradually through trade, commerce and usage, in a manner similar to the development of agriculture, art, contract, language, law, markets, music and science.

To protect against losses in shipping was one of the early uses of insurance, going back nearly 4,000 years into antiquity. The earliest historical record of insurance for shipment of goods dates back to the Code of Hammurabi which appeared around 1800 B.C.E.

Starting in the late medieval and early renaissance periods in Europe insurance gradually evolved into arrangements to protect against a myriad of potential losses.

The use of insurance in Europe increased with the rise of trade and commerce in the late medieval period, 1200 to 1500 C.E. In 1310 a Chamber of Assurance, i.e. insurance, was established in the Flemish commercial city of Bruges, located in the northwest of present day Belgium.

The image above, a painting by Dutch artist Ferdinand Bols (1616-1680) entitled "Governors of the Wine Merchant's Guild" symbolizes the cooperation of merchants in post-renaissance Europe to reduce the impact of commercial risk by means of insurance arrangements

The image above, a painting by Dutch artist Ferdinand Bols (1616-1680) entitled “Governors of the Wine Merchant’s Guild” symbolizes the cooperation of merchants in post-renaissance Europe to reduce the impact of commercial risk by means of insurance arrangements.

Around 1688, an Englishman named Edward Lloyd opened a coffee house in London that achieved worldwide fame because of the commercial activities of his customers. Lloyd’s coffee house was frequented by ship owners, merchants and financiers who began to write contracts of insurance, in which the financiers assumed the risk of a disaster at sea in exchange for payments from the owners of ships and cargo. Lloyd’s of London was never an insurance company; rather it was, and still is a place where insurers transact business.

Lloyd's subscription room, early 19th century.

Lloyd’s subscription room in London, England, early 19th century

Lloyd's today, located in the financial district of London.

Lloyd’s today, located in the financial district of London

Over time the insurance business at Lloyd’s evolved beyond maritime risks into every imaginable form of insurance, including exotic contracts that made Lloyd’s famous worldwide. For example, American film star and dancer Betty Grable (1917-1973) was celebrated for having the most beautiful legs in Hollywood. She had her legs insured through Lloyd’s of London.

Betty Grable, 1943, showing off her "million dollar legs."

Betty Grable, 1943, showing off her “million dollar legs”

Actuarial science and underwriting

The business of insurance was enabled to expand to insure a wide variety of risks because of intellectual developments that have become known as actuarial science.

Actuarial science is the discipline of analyzing the financial consequences of risk in insurance, finance, and other activities and industries.

Thomas Bayes (1701-1761), English statistician, philosopher, and Presbytarian minister.

Thomas Bayes (1701-1761), English statistician, philosopher, and Presbytarian minister.

The actuarial basis for modern life insurance, annuities and pensions was pioneered in large part by the statistical and theoretical work of five Englishmen: John Graunt (1620-1674); Edmund Halley (1656-1742) of Halley’s Comet fame; Daniel Defoe (1660-1731), author of the famous novel Robinson Crusoe, Thomas Bayes (1701-1761); and Richard Price (1723-1791).

Underwriting, that is the pricing of insurance, is related to risk reduction by the insured or by cooperation of the insured and an insurer. For example, a fire insurance company will lower its fire insurance rates on structures that are fire resistant. Life insurance companies charge lower rates for people who don’t smoke or consume alcoholic beverages.

However, life, accident, and health insurance rates may be higher than normal in the case of people who engage in risky activities, such as skydiving or riding a motorcycle. Bodily injury insurance for motorcycle users may be higher than for drivers of automobiles.

Skydivers

Skydivers above Queenstown, New Zealand

An ally to protect against loss

In an ideal operation of insurance, insurance companies would have much more than the responsibility to pay for losses suffered by an insured. An insurance company would have a proprietary incentive to protect the customer from the actual occurrence of loss. For example, a fire insurance company would provide recommendations for prevention of fire in each insured structure, with rates variable in accordance with customers’ implementation of the suggested prevention measures.  If the insured suffers a loss, or fire, so does the insurer. If the insured is protected from loss, both the insured and the insurer benefit. By purchasing insurance the insured would be purchasing an ally in a company that would have a great deal to gain by protecting its insureds and a great deal to lose if it fails to protect the insureds from losses.

Damaged homes in Montecito, California (outside Santa Barbara). The single home not destroyed was spared due to the efforts of a private fire and insurance company.

Image of destroyed and surviving homes from the 2008 fire at the Montecito suburb of Santa Barbara, California. Insurance company AIG provided fire protection to its customers by fire crews that sprayed nearby vegetation with fire retardant and moved flammable lawn furniture away from the homes.

That is currently not the present condition. In the relatively primitive nature of insurance under control by the political state and its coercive monopoly of protection, insurance companies can do little more than provide advice about loss prevention and honor their promises to pay claims for losses when claims are presented.

Insurance and defense

The institution of insurance has the capability of expansion to provide real security against domestic crime and foreign aggression such as the military attacks of Japan in 1941 against the military forces of the U.S. in Hawaii and the Philippine Islands. The institution of insurance also has the capability of preventing or providing successful defense against terrorist attacks of would be state organizations such as the terrorist organization that twice, in 1993 and again in 2001, attacked the World Trade Center buildings in New York City.

It was the goal of Andrew Galambos and is the goal of CTLR to explore the possibility of greatly reducing, or completely eliminating man-made catastrophes by the development of voluntary, non-coercive, competitive protection and security services that would supplant and supersede political states.

According to a 2008 New York Times article, the terrorist attacks of 2001 incurred roughly .3 trillion in damages.

According to a 2008 New York Times article, the terrorist attacks
of 2001 caused roughly US $3.3 trillion in damages to the World Trade Center in New York City (depicted above) and the U.S. Department of Defense Pentagon building in Washington, D.C.

Insurance and health care

In the health care realm, the idea of insurance has been badly misconceived and misapplied both by direct state action as a supposed insurer and by political regulation that prevents voluntary and proprietary insurance arrangements that would serve people well.

As an example, economics professor John H. Cochrane makes the following perceptive observations about health care insurance:

“None of us has health insurance, really. If you develop a long-term condition such as heart disease or cancer, and if you then lose your job or are divorced, you can lose your health insurance. You now have a preexisting condition, and insurance will be enormously expensive—if it’s available at all. Free markets can solve this problem, and provide life-long, portable health security, while enhancing consumer choice and competition.

John H. Cochrane, the AQR Capital Management Distinguished Service Professor of Finance at the University of Chicago Booth School of Business

John H. Cochrane, the AQR Capital Management Distinguished Service Professor of Finance at the University of Chicago Booth School of Business

“Health-status insurance’ is the key [to solution of this problem]. If you are diagnosed with a long-term, expensive condition, a health-status insurance policy will give you the resources to pay higher medical insurance premiums. Health-status insurance covers the risk of premium reclassification, just as medical insurance covers the risk of medical expenses. With health-status insurance, you can always obtain medical insurance, no matter how sick you get, with no change in out-of-pocket costs. With health-status insurance, medical insurers would be allowed to charge sick people more than healthy people, and to compete intensely for all customers. People would have complete freedom to change jobs, move, or change medical insurers. Rigorous competition would allow us to obtain better medical care at lower cost. . .” (Quoted from Cato Institute–Policy Analysis No. 633, February 18, 2009, “Health-Status Insurance: How Markets Can Provide Health Security” by John H. Cochrane.)

Insurance and social welfare

In the long run insurance for retirement income and health care will be provided privately, to the extent people are willing to pay for the protection—and most will be willing to pay. For people of modest means it seems probable that the insurance industry could develop relatively low-cost insurance programs that are affordable by less affluent people while still providing a worthwhile supplement to personal savings.

For people lacking the means to buy any insurance for health care and retirement the social institution of charity will be available, especially when the state has vanished and with it the enormous tax burden borne by most people. In that circumstance it is reasonable to expect that those better off than others will give to charities that help the less fortunate.

More importantly, with the end of the political state and its ever-growing exactions of taxes from the public, the overall standard of living is bound to increase so much that even lower-income members of society will have means to provide for their financial well-being in their later years.

Innovation and technology in protection against loss

So far, no political catastrophe has been as threatening to the human species as would be the impact on earth of a large asteroid. Geologists, paleontologists, and other scientists have concluded that a large asteroid that struck planet earth 65 million years ago caused climate changes that killed off 70 percent of all plants and animals on earth at the time.

An artist's rendering of the Cretaceous-Paleogene extinction event, most likely caused by a large asteroid hitting earth 65 million years ago.

An artist’s rendering of the Cretaceous-Paleogene extinction event, most likely
caused by a large asteroid hitting earth 65 million years ago.

A subsequent chapter on defense will explore the possibility of such events as terrorist attacks and natural catastrophes becoming insurable risks due to advancing technology in both the physical and biological sciences and insurance.

For insurance to constitute a viable protection from such disasters, there are three requirements.

First, the insurance industry would have to expand far beyond its size as of the early 21st century. Second, to minimize or prevent war damage, insurance as an industry would have to collaborate with the security industry, i.e., the industry now known as private security. Third, science and technology would have to advance to a point where natural disasters could be headed off. For example, insurance could be a source of financial assets to pay for developing a technology in which asteroids would be steered away from earth, and where the massive forces within active volcanoes would be vented gradually rather than being allowed to build up to a giant explosion.

Yellowstone magma chamber.

Eruption of a supervolcano such as the Yellowstone caldera in the Rocky Mountains of North America would cover most or all of North America with volcanic ash and could cause a period of global glaciation sufficient to threaten widespread species extinction.

The pseudo-insurance operations of political states

American sociologist (1929-2008)

American sociologist Charles Tilly
(1929-2008)

As noted sociologist Charles Tilly observed, “governments are in the business of selling protection, whether people want it or not. . . Someone who produces both the danger and, at a price, the shield against it is a racketeer. Someone who provides a needed shield but has little control over the danger’s appearance qualifies as a legitimate protector, especially if his price is no higher than his competitors. Someone who supplies reliable, low-priced shielding both from local racketeers and from outside marauders makes the best offer of all.” (Quoted from Charles Tilly, “War Making and State Making as Organized Crime,” in Bringing the State Back In, 1985, pages 170-171 and 175.)

Furthermore, in the case of the United States, and every other political democracy, unlike insurance companies the state protectors do not engage in actuarial analysis to determine the degree of risk that they are insuring, do not engage in underwriting to price the cost of protection, and do not accumulate a fund of assets to pay claims for losses when they occur. Therefore, all political democracies in existence in the early 21st century are bankrupt because they will all become unable to honor their promises due to their defective mode of operation described immediately above.

Insurance as an integral element of all other forms of property protection

This chapter’s examination of the ideas and principles of insurance serves as an introduction to subsequent chapters examining the use of insurance to provide human security, a humane and effective system of justice, security against domestically originating attacks on life and other forms of property, and large-scale defense, heretofore commonly referred to as “National Defense.” As we have indicated in chapter 1, Replacements for the Political State, and will elaborate further in later chapters, defense of a nation is a problem limited to the transitional period between the present existence of nation-states, and what CTLR posits is the ultimate and inevitable extinction of the state as a form of human governance.

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