Serious Moral Hazard: The Consequences of Mandated Insurance in all Markets

So this is just a commentary, but I think it's an important exercise in judgement analysis.

Peter Coy, my boy at Bloomberg Businessweek, just made the case that we shouldn't just be mandated to by health insurance, but we should be mandated to buy all types of insurance, because:

The logic of getting everyone to jump into the risk pool is powerful: Left to their own devices, many people will choose to go uncovered against fire, flood, car crashes, and cancer. Then, if something bad happens, they throw themselves on the mercy of society. The cruel solution would be to let them live (or die) on the streets. To our societal credit, we are unwilling to do this. A coverage mandate at least ensures that people who create the risks will bear the costs, on average, over time.

At first sight, it seems unquestionably obvious: let's get everyone to buy all types of insurance.  That way, we don't have to face that moral dilemma of asking ourselves, "Well, should I let that person I don't know just die, lose his home, and have the guilt of conscience that I refused to help another family, with kids, in need?"

I mean, our federal and state governments collectively already make us buy tons of insurance:

States require drivers to carry liability insurance. Your state government also provides you with—and charges you for—insurance against losing your job. The federal government mandates flood insurance for anyone living in a flood plain who has a federally insured mortgage. Social Security is mandatory insurance against a penniless old age, and the premiums are deducted from your paycheck, whether you like it or not.  

Great idea, then, right?  Maybe not.  What would happen if we were all covered for our potential mistakes or natural hazards?  Would we stop caring about where we move, ignoring "tornado alley" and building there anyway because, heck, you're covered, right?  Or flood alley?  Or earthquake alley?


More people may be harmed.  Because the perceived danger of living in a dangerous environment has decreased in risk, and therefore price.  This may then actually incentivize more individuals to live in the exact place where they initially try hardest to avoid: dangerous environments that increase their chances of major harm and reckless decisions.  And death.  Let's not forget death.  Why?  Because the financial risk is gone!


And Coy fundamentally makes an argument about finances.  People avoid buying insurance because it's too costly.  So, if we reduce the percieved cost, what's not to attract more demand of riskier living environments?


Decisions that used to cost more, like living in a flood zone, tornado alley, eating high-fat foods--now all cost less because he's paid a premium for protection against the negative consequences they bring forth: death.  And depending upon the estimate, each human American life is worth about $10 million.  So, looks like we've just lost that and more.


Unless, of course, they all die, and then we don't have reckless people raising premiums of insurance, and we leave only the risk-averse individuals alive.  But that's not necessarily equitable.  And it is a huge leap.  But that's the point.  To show that ensuring all people for everything is a huge, inequitable leap that borderlines fanatical and betrays our moral sentiments to help our fellow man.