There would be fewer Lincoln Navigators and Lexus IS 350s on the road. Why? Because car “insurance” is not really insurance. Insurance in a free market would consist of purchasing protection for your own vehicle. Liability insurance could not exist in a free market for reasons Hoppe explains here. The system of liability “insurance” is actually just another form of socialism for the rich… I can drive a Lincoln Navigator at a much reduced insurance premium precisely because everyone else driving around me is forced by the law to have liability “insurance” in the event they hit me. So, rather than me having to pay for my own decision to drive a Lincoln Navigator in the form of steep insurance premiums, everyone else on the road is forced to pay.
I saw through this charade when I got my first car at 19, almost decade before I read Hoppe’s article above. My car cost $600 and I was forced to insure at a bi-annual cost equal to what I paid for the car itself! How is that insurance?? Answer: it’s not.
We discussed this quite a few times and there’s no point in going at it again. But for the record, I will restate my strong belief that liability insurance has nothing to do with the state or some socialist agenda (and that Hoppe should stick to what he knows best, i.e. everything besides insurance).
In my own Albania, hardly a well developed financial market you’ll agree, no insurance but auto third party liability is compulsory, and still all kinds of liability policies, from engineering to public, professional and other, sell freely and profitably (I’d know, I work in insurance regulation). Imagine how much bigger would the market in the bee if not stifled by regulation.
If Clayton will allow, I’ll answer. Hoppe states that insurance does not work for non accidental cases, i.e. cases where the insured has considerable control over the event. Thus, according to Hoppe, you can insure flood, because you cannot control flood (but you can take steps to limit the damage it does to your property, can’t you?), but no t liability, because you fully control the event.
The issue here, is that Hoppe is ignoring so-called bonus-malus systems. You, who’ve had no claims in years will pay a much lower premium that I, who cost my company money every day. So, even if you can fully control the amount of claims you cost the insurer, you eventually end up paying for those claims as higher premiums. Statistically it’s easy to see that control on the event by the insured does not invalidate insurance.
Liability insurance was purchased long before any state mandated it to be purchased as a condition to obtain a driver’s license.
The more litigious 20th century ushered in an age where this specialized form of insurance was in demand.
In general, most insurance was historically bought to cover one’s own property, or in the case of merchants the goods they were transporting.
While some governments did get involved in insurance, such as the Achaemenian monarchs (550-330 BCE), most of the insurance was organized by mutual, voluntary exchange by individuals who sought to make profit by covering other people’s risk.
Thanks, Merlin. I think there’s another issue here, namely the meaning of “considerable control”. For example, in the case of an auto collision, I could be said to have had considerable control over the event, depending on the meaning of “considerable control” being used. After all, I had control over when I was driving my car, where, and how fast. While I didn’t have control over the other person’s actions, had one or both of us not been there, the collision wouldn’t have occurred.
Conversely, with liability insurance, do I have considerable control over when others are going to sue me or file claims against me? Again, it depends on how “considerable control” is being defined. I think it could go one way or the other. Ironically enough, though, Hoppe’s argument implies that the wealthy would pay higher premiums for liability insurance if they tended to get sued more often.
Give a specific example. The only liability insurance that I’ve know of is the type mandated by licenses. For example, an M.D. is required to purchase liability insurance to comply with requirements of his medical license.
Well, we should distinguish between insurance against wrongful lawsuit and insurance against damages caused by a tort. I have no control over whether someone sues me. So, I can insure against the legal costs of defending against a wrongful/trivial lawsuit. However, insurance against damages caused by my own tortious actions is not possible. The idea of “paying it back over time” in the form of higher premiums is not insurance, that’s some sort of structuring/loan where someone pays your damages on your behalf if you sign a contract to make regular monthly payments that, when added together, exceed the original lump sum payment they made on your behalf.
I know you’re in the business Merlin but I think Hoppe is dead on from the analytical point of view and I think your experience in the real-world insurance business - which is distorted by government regulation - actually makes it harder for you to analyze the nature of insurance sans government intervention. Hoppe’s point is almost elementary - you can’t profitable insure people against things that are the result of their own decision because of adverse selection… people will buy the insurance for the express purpose of making the given decision.
I can only add that any statistician would be hap[y to take up the challenge given some data, to model the premium rates needed to neuter adverse selection. And the real distinction form a loan (which would not be a bad idea either) is that if data shows that you are not very likely to, say, beat up someone again, than you wont pay higher premium in the future, whereas if we where talking about a loan, you’d pay it back no matter how likely it is for you to repeat your offense.
To repeat myself, I see no point in going over this again. Only when a truly free market comes to life, we’ll see whether liability is still there.
Well, engineering liability is a prime example. No one compels you to insure the liability of erecting (or designing) a decent building, yet construction companies or engineering firms that care for their image purchase those willingly, and engineering is by far the highest proportion of business for the liability class (excluding auto, of course).
But even speaking of developed markets, the extensive public requirements for liability insurance are not completely baloney. For example, if roads where privately owned, I really believe that most owners would require some sort of insurance (probably so-called no fault policies, to be precise). Many of the requirements that ‘drive’ liability insurance in many markets right now are connected to sovereignty, not the state as such. When sovereignty over some territory is transferred to the owner and to him alone (i.e. market anarchy), he’ll still have to make the choice of requiring liability insurance or not. Hence, liability insurance is almost entirely mandated since sovereignty is completely ‘public’.
Sorry, I meant to reply to this a while ago. I got sidetracked in reading about insurance, liability, torts, etc.
I agree that “paying it back over time” in the form of higher premiums isn’t insurance. As I understand it, higher premiums aren’t intended to serve as a method of restitution. Instead, people face higher premiums when they’re deemed to be higher risks. While this can be seen as a “punishment” to those people, because they can no longer be insured at the premiums they were used to, that isn’t the point as far as the insurance companies are concerned. Furthermore, nothing prima facie entitles people to specific insurance premiums.
So with this in mind, let’s say that Smith files a tort claim against Jones. Jones has a liability-insurance policy from Acme Liability Insurance, which he uses to initially cover the costs of his defense. However, the court ends up finding in favor of Smith’s claim. Legally speaking (at least), this means Jones did commit a tort against Smith. Depending on Jones’ policy, he may or may not owe back the defense costs to Acme at this point. Regardless of that, however, Acme could place Jones in a higher-risk liability category as a result of the decision against him. Certainly the likelihood of this would increase as more court decisions are made against Jones.
As I’m sure you’re aware, not all torts are created equal. One distinction is between intentional and unintentional torts. In the case of the latter (e.g. negligence), it’s unclear to me whether one can consider the tort to have been under “considerable control” of the tortfeasor. Hence I think this is why liability insurance exists.