The role of government in the insurance industrySubmitted by nodeal on Tue, 04/29/2014 - 22:52
I have a good friend of mine who works in the insurance industry. He analyzes risk and helps predict costs. We got into a heated debate, since he thinks government needs to take a role in the insurance industry. He is more informed on the insurance industry and policies since he works in the field, and he proposed a viewpoint that I would like you guys to respond to so I may propose to him a rebuttal. Here is the paragraph he wrote to me:
"The Terrorism Risk Insurance Act (TRIA) is an insurance treaty we have with the government. TRIA allows us to price insurance the way we do for many small businesses. If TRIA wasn't in place, we would have to raise our premiums because we wouldn't be protected if we experienced catastrophic losses from certain acts. Insurance is special in that you don't know the price of a product until later. All premiums are based on your expected losses, with some profit and commission and expense loads. Without the guarantee of TRIA ,we wouldn't be able to price as low as we do."
"In addition, the Floral Insurance Guarantee Association (FIGA) is extremely important in protecting those who are insured. For example, last year an insurer in Florida went insolvent, meaning they couldn't pay their outstanding claims. So what happens to the policy holders? They paid for insurance, but their insurer didn't price their business right, had too many losses, and went out of business. So the government stepped in and said, "Hey, all the solvent insurance companies still in business in Florida, based on how much premium you wrote in Florida, we're going to divide those total losses amongst all of you." The government looked out for the policy holders, and they allowed the companies to recoup that money in the form of a surcharge. Without government, in a truly "free-market", those policyholders would have been assed out from a product that they paid for, which was insurance for their business."
"What do you expect to happen if the government got out of the insurance business? We would have to raise our premiums at a cost to the consumer, and policyholders like the ones I demonstrated in the FIGA example would be completely screwed!"
So, for those of you more well versed in the topics of liberty, especially as it pertains to the insurance industry, I would really appreciate your input. How would you respond to these claims? How would things be handled in a free market in regards to insurance policies, prices of premiums, insurance companies that go out of business, etc.?
Thank you for your time!