All Commentary
Tuesday, May 1, 1973

Freedom Is an Uninsurable Risk

Under “no-fault” auto insurance, presumably every owner would be covered and have to pay premiums, and most claims for damages would be drawn against the pool, regardless of whose negligence might have caused or contributed to the casualty. In many respects, such “no-fault” insurance resembles Workmen’s Compensation and is in keeping with other developments in our welfarist society.

Formerly, an individual was allowed to assume the risks and responsibilities of caring for himself in his old age. Then came “Social Security,” and rare today is the individual who is allowed exemption from this compulsory program.

Compulsory unemployment insurance now tends to relieve individuals of full responsibility for earning a livelihood.

Consistent with universal compulsory schooling are various governmental child care and family assistance programs.

Health care and medicare insurance programs have been largely collectivized and rendered compulsory.

Plans are being discussed for governmental remuneration of any victim of crime, regardless of contributory negligence by the victim — or by the police force instituted to suppress crime.

One after another, the risks of living, that once might have been assumed by the individual or insured against privately if he so desired, have been brought under compulsory insurance programs which cost a typical tax-paying family $2000 a year. This amount is increasing and is now some three times what it was a decade earlier. Further, this figure is over and beyond the costs of any insurance policies still privately carried such as life insurance, home owner’s fire and casualty, automobile liability and casualty, private pension and medical plans, and so forth. Some private insurance costs are loaded into rental rates and carrying charges on mortgages and other loans, or as fringe benefits of employment, so that the customer may not be fully aware how much he pays privately for insurance — any more than he would know how much of his tax bills go toward compulsory insurance coverage of one kind or another.

The Age of Socialism

The point is that many Americans, from those living below the so-called poverty level on up through middle and higher income groups, literally are being insured to death. The age of compulsive and compulsory protectionism is upon us, and another name for this is socialism. It is not insurance.

A voluntary insurance contract is a viable and sound protective device for the pooling of the classifiable and calculable risks people encounter in life. In a competitive market economy where savings may be privately accumulated and invested and owned — where private property is respected — men have long since devised cooperative ways of insuring themselves against various contingencies.

But the application of the insurance principle depends upon a fairly accurate and reliable method of grouping the risks into classes. In the case of life insurance for instance, a person of a given age and normal life expectancy would not want to be pooled at the same premium rate charged persons of another race or society or of advanced years with a life expectancy much less than his own. Nor would Mr. Average want to be pooled with a group known to have a poor medical history or with persons engaged in a particularly hazardous occupation. Such classes of risks each would be expected to have its own premium for life insurance, based upon fairly accurate actuarial tables or experience ratings. Otherwise, anyone with longer life expectancy would more than likely carry his own risk —stay out of such high-cost pools —perhaps form a new company with others in a class of risk comparable to his own. Men acting voluntarily in open competition thus tend to serve and satisfy their respective and variable needs, each buying as much life insurance as he chooses at competitive rates befitting his class of risk.

Supposedly, however, there is something wrong with such voluntary life insurance: it fails to cover those who do not want to be insured and who would not, or could not, voluntarily pay premiums at competitive rates. In other words, if life insurance is voluntary, some persons may choose to use their property for purposes deemed by them to be more important than insurance — possibly for food, clothing, shelter, recreation, some other form of saving and investment; perhaps even for cigarettes, liquor, drugs, gambling or who knows what.

Not Like Insurance

Under the Social Security program of the United States, the Federal government insists that nothing shall be more important to an individual during his working lifetime in “covered employment” than that 11.7 per cent of the first $10,800 of his annual earnings (1973 rates) be paid into the Social Security pool, regardless of his current needs for food, clothing, shelter, or whatever.

True, the OASDI premium payments may vary depending upon the amount of one’s earnings; and the eventual benefit payments also may be related to one’s record of past earnings. But there also are marked departures from the established insurance principle of grouping the risks into comparable classes. For instance, the premium rate is the same for a youth in his twenties as for a person in his sixties. The coverage is the same for those who want less insurance, or none, as for those who want more; the same for all occupations, races, colors, creeds, regardless of actuarial histories. Such unrealistic groupings explain why this sort of an insurance program has been made compulsory; it simply couldn’t attract voluntary participation.

Hard-to-Classify Risks

The principles that apply in the case of life insurance also relate to other types of insurance: fire, theft, liability, collision, hail, windstorm, flood, malpractice, and so on. If a program of voluntary insurance is to be practical, then the risks must be measurable and more or less easily classifiable so that rates may fairly reflect the costs for a particular class of risk. And in some cases, such as hail or hurricane or flood insurance, the risks may differ so much from one geographic area to another, or may be so great in any given area, that an owner might simply elect to take his loss if and when it occurs rather than pay a very high annual premium. Following a local hailstorm or hurricane or flood of disastrous proportions, there is likely to be a clamor for Federal aid — which would amount to compulsory insurance of these hard to-classify risks on a nationwide basis.

Another principle of sound insurance is that the policyholder (and presumably the one who pays the premium) has a morally and legally insurable interest in the property in question. In other words, it is definitely to his interest to see the property maintained intact in its prevailing use rather than lost or destroyed. He’d rather have his home or business property as it stands than to have it burned down for the insurance. He’d rather have his actual and anticipated earnings from the market place than to collect on his life or disability or unemployment policy. Some persons are known to be poor moral risks for certain types of insurance, and no one of sound mind and character willingly chooses to be pooled with such high-risk cases when he buys his own insurance.

Breakdown of Morals

The proliferation of compulsory government insurance programs in any society seems to be closely linked with the moral deterioration of the people, though the programs are seldom if ever initiated or promoted on any such premise. On the contrary, Social Security, Workmen’s Compensation, Unemployment Payments, Medicare, Disability Benefits, Veterans Pensions, Family Welfare, No-Fault Auto Insurance, Flood Relief, and the like invariably are launched upon good intentions to help the hapless and worthy poor — usually at taxpayer expense. But if actuarial tables tell us anything for certain, the fact is that subsidizing a weakness aggravates and accentuates it. The “worthy poor” multiply in proportion to the handouts made available — which is a condition known in the insurance business as a poor moral risk. The same result may be expected of any compulsory insurance program: excessive demand for the benefits, and no one volunteering to pay the premiums.

The Human Situation

The utopian dream of living exclusively upon the fruits of the labor of others is forever doomed to disappointment. And the reason is clear. There are no “others” who want to work and produce and save entirely for someone else’s satisfaction rather than for their own purposes. Socialism sadly misreads the human situation, presuming self-interest to be no significant feature of human nature. “All for each and each for all,” is the basic socialist slogan, and it does have great emotional appeal; wouldn’t that be nice!

“To each his own,” however, is a slogan far more consistent with the nature of man. He is motivated by self-interest, and often, if not always, can understand that it is in his own best interest to serve efficiently the most urgent interests of others. Thereupon rests the case for private ownership of property, voluntary exchange, open competition and government limited to policing the market. This affords the maximum or optimum cooperation possible among men who are not perfect saints. The consumer may be king, but only if he is guided by the economics of production rather than by the fictions of consumerism or the fully insured life. What is not produced may not be consumed. And what is not privately owned and controlled is not realistically insurable.

An Insurable Interest

So, we come once more to the principle of insurance against casualties and the reason why the principle is inoperable under socialism. If there is property, a portion of it may be invested (pooled, if you prefer) to cover the probability of losing all of it. Now, who is interested in covering that sort of risk? Have you ever seriously considered buying a policy to insure your neighbor’s life or his house against loss by fire? Probably not. You insure your life or your own property against such losses, and you do it only because that property, or the loss of it, is all yours.

The Preamble to the Constitution of the United States reads like an insurance policy: We, the people… in order to… insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution..

Here we have the one thing and the only thing in which all the people of a society have a common insurable interest: protecting peaceful persons and their activities against criminal intervention — in order to secure the blessings of liberty. The Founding Fathers thus gave us the formula for limited government — compulsory insurance against criminal intervention.

In contrast, the formula of compulsory collectivism — “to each according to need” — would presume to insure against every contingency, thereby precluding the forever uncertain blessings of liberty. Governmentally managed “welfarism” has been thoroughly tested, in the United States and in other nations. All the evidence indicates that this leveling-down process eventually strips the individual of his dignity, choice, incentive, property, and personality — a compulsory insurance scheme with its premiums taken “from each according to ability.”

Many today have forgotten that the Pilgrim Fathers on the shores of Massachusetts, as well as the first colonists of Virginia at Jamestown, tried this communal form of insurance. Out of their common product and storehouse they set up a system of rationing. And the result was famine — until they abandoned the socialist formula and resorted to private ownership, competition, and trade.

The lesson seems to be that the most trustworthy way to insure one’s life, or property, or anything else one possesses of value is to put that property and those talents to productive use. By thus serving others, one earns from them all the insurance he deserves.

If a person would be free, he has to assume the responsibilities and uncertainties of open competition and peaceful exchange. These essential conditions of freedom, as variable as the thoughts or the fingerprints of individuals, are not subject to classification, nor can the results be calculated or known in advance. This is why freedom is an uninsurable risk.



Voluntary Co-operation

In a world of voluntary social co-operation through mutually beneficial exchanges, where one man’s gain is another man’s gain, it is obvious that great scope is provided for the development of social sympathy and human friendships. It is the peaceful, co-operative society that creates favorable conditions for feelings of friendship among men.

The mutual benefits yielded by exchange provide a major incentive to would-be aggressors (initiators of violent action against others) to restrain their aggression and co-operate peacefully with their fellows. Individuals then decide that the advantages of engaging in specialization and exchange outweigh the advantages that war might bring.

MURRAY N. ROTHBARD, Man, Economy, and State

  • Paul L. Poirot was a long-time member of the staff of the Foundation for Economic Education and editor of its journal, The Freeman, from 1956 to 1987.