Tuesday, July 13, 2010

Insurance, the N.R.A., and State Power

In the health care debate this year, for instance, the N.R.A.'s lobbyists worked with the Senate majority leader, Harry Reid, to include a little-noticed provision banning insurance companies from charging higher premiums for people with guns in their homes.

This is a blatant misuse of state power.  Insurance companies should be allowed to charge any premium their accountants say makes sense.  If people with guns in their homes have more insurance claims on average, then the insurance company should be compensated for the higher risk.  It is completely ridiculous to assume that the insurance companies are unfairly discriminating against gun owners.  Any company that did so would rapidly lose all of their gun-owning customers to an insurance company that charged fair rates.  This new law will force all people who do not own guns to subsidize the people who do own guns.  If the insurance companies cannot charge gun owners for their higher risk, then they have to raise rates for everybody to cover their costs.

Insurance rates are absolutely the best way our civilization has for putting the proper price on risky behavior.  You cannot expect people to calculate all of the long-term costs and benefits of all of their actions.  But insurance companies are full of professionals who do just that.  If these companies were free to set rates at will, then this would send an immediate signal to people about the costs of their actions.  People might not know the true costs of smoking, and they may not trust government messages, but they will pay attention if life insurance and health insurance rates are much higher for smokers.  By transforming an uncertain future cost into an immediate present cost, insurance companies can provide an incredibly valuable information service to consumers.

But we have a plethora of laws that prevent them from doing this.  Insurance companies are explicitly banned from putting a proper price on risky behaviors.  There are only a small number of behaviors that they are allowed to accurately price.  This means that people have no incentive to stop their risky behaviors, and everybody suffers as a result.

If insurance companies were allowed to accurately price risk, then there would be less need for government intervention into risky actions.  If people had to pay the true costs of drinking alcohol or owning guns or consuming too many calories, then there would be less of these actions, and also less demand for government intervention with respect to these actions.

Our current state of affairs comes from people not understanding what prices are.  If the insurance company charges then a higher price for owning guns, they see it as unfair or an insult.  They do not see it as an accurate signal of the costs of their actions, which it will be if there is any competition in the insurance market.

Note that I am very much in favor of the right to bear arms.  The state should not prohibit law-abiding citizens from owning weapons.  It is, and should be, a fundamental legal right.  But exercising that legal right has costs, and I hold it as a fundamental principle that people should pay the costs of their actions.  The state should not prevent people from owning guns or smoking or doing drugs, but it should also not prevent insurance companies from charging the appropriate price for these actions.  People should be allowed to do anything they want, provided that they are willing to pay all of the costs of their actions. 

Preventing people from doing things is bad, but artificially shielding them from the costs of their actions is just as bad.

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