On Insurance

I notice that there have been a number of comparisons made between the failure of SCF and the subsequent government payout and the Christchurch earthquake and the payout in process by the EQC. Some bloggers, noticeably Marty G of the Standard and Bomber Bradbury of Tumeke!, have complained about the Government’s apparently profligate use of taxpayers money to “bail out” SCF and its more muted response to the plight of the uninsured in Christchurch. Yet the discrepancy precisely illustrates the purpose of insurance, which is to spread risk.

The fundamental misunderstanding here, as others have pointed out, is that SCF was not bailed out but paid out. The SCF payment was part of the government sponsored deposit guarantee scheme – essentially an insurance against losing your deposit. It is the only reason why depositors would consider keeping their money in banks and finance companies, particularly the riskier ones. The depositors were insured, just as were the Christchurch people with home insurance (part of which is underwritten by the EQC, in the event of an earthquake). It is a whole different ball-game to offer to pay people who are not insured. If the government will do that, why would any one insure privately?

Now don’t mistake me here. I am not at all against the government providing emergency assistance. This is our duty as fellow citizens of New Zealand to help out in times of crisis. It is also a reasonable function of government to provide emergency aid, especially initially, as it takes the voluntary aid organisations some time to adequately fund-raise before they can offer substantial help. It is also the function of a council to have earthquake provisions in place to ensure water, sewage and electricity is repaired as fast as possible.

But it is not the function of government to provide blanket insurance. I find the EQC to be a rather strange concept, as it appears to take part of your insurance policy and guarantee payment, taking it out of the hands of insurance companies, who are experts at calculating risks and placing it into the hands of bureaucrats, who are not. This does not seem a sensible proposition to me. Its only value appears to be protecting people against insurance companies going under because they have inadequately underwritten themselves, but there are a number of better, less bureaucratic ways of doing this, including a similar scheme to the one that paid out SCF depositors.

Marty G proposes that the problem of the un-insured can be dealt to for the next earthquake by moving the funding mechanism from housing insurance to rates. Unfortunately this is not a good idea. There are essentially two sorts of people who do not insure a valuable asset such as a house – the very rich, to whom the loss is inconsequential and the very poor, who cannot afford insurance premiums. This latter group will no more be able to afford the increase in rates as they were able to pay insurance premiums. But, as rates are compulsory, they will now no longer have the choice of avoiding payment. Therefore the group most disadvantaged by placing earthquake insurance in rates will be the poor. Essentially, the effect would be the same as if you legislated compulsory house insurance.

There are additional problems. What if you are behind with rate payments – do you lose your insurance as you would if you fell behind with your insurance policy payments? Will the insurance payout be based on the often inaccurate assessment of the QV? Who will hold the funds and the liabilities, local or central government? If the latter, do the local governments really want to be collecting more revenue for the state, knowing that it is the councils who will be blamed for high rates? Is it right to insist that people buy insurance, no matter how important and necessary.

As Obama can attest, trying to develop some sort of universal insurance is both expensive and very difficult. People do not want to pay extra taxes for it and people who do not want the insurance will still do their best to avoid paying for it. Even with nearly a trillion US dollars, the best that Obama can hope for is halving the number of medically uninsured. I suspect we will not have much better luck here.