Monday, June 1, 2009

Supernatural Disaster Insurance 2: Insurance Harder

Reprinted from
Cover from Superman #677 by James Robinson and Renato Guedes. Cover by Alex Ross.

Thank you all for your wonderful comments on the earlier Supernatural Disaster Insurance post. As promised, here is the sequel, equipped with some of my views on the matter.

There were three systems I had proposed in the first post: a full public system, a public/private mix, and a solely market-based system.

The merits of the market-based system are that it would allow individuals to choose the insurance system that they feel is most appropriate for their situation. It would also minimize public taxes and curb any potential moral hazard problems. The problem here is that, first of all, it is likely that the low-income individuals would be boxed out of the system. With the frequency with which supernatural disasters occur in the comic book world, premiums would likely be very expensive -- especially in Metropolis, New York, etc. It is also generally regarded that the income disparities in cosmopolitan cities in the comic world world are considerable and only widening by the month. The poor in Gotham can barely afford food (one of the factors which contributes to the significant crime rate in the city). Hardly would they be able to afford insurance on their homes. And that means that if Two-Face blows it up, time to get a new home!

The other issue is that I think there are potential adverse selection problems. A commenter, Ajay, pointed out that this is unlikely to occur with the higher-income people since they tend to have more property and assets and hence more expected loss (and more reason to insure against those losses). This is a great point. But consider other factors. What about region? In a voluntary system, it is likely that individuals living in particularly dangerous neighborhoods will purchase insurance, especially if premiums are not underwritten. People living in neighborhoods that don't see many pumpkin bombs or batarangs on the other hand will likely opt out. And those populations are not insignificant. Superhero violence, though having the potential to occur at any given neighborhood, does tend to be localized. How many times has the Daily planet been destroyed? How many times has Spiderman fought around Times Square? Let's face it -- certain neighborhoods are like tractor beams for superviolence. Hence, those choosing to opt out of the insurance system, feeling they are generally safe from harm's way, will cause average premiums to skyrocket, will impose an extra cost burden on those that need insurance the most and will further shrink the market.

A public/private system is an interesting solution because it will enroll more of society's low-income populations. Considering a "catastrophic" mechanism, the lower-income populations would be able to insure against major damages to their their property. So if I were living in New York, I would feel safe knowing that my home is protected against any potential throwdowns between the Green Goblin and Spiderman. If, however, I live in a neighborhood where lots of cars get blown up by pumpkin bombs, I might consider some supplementary insurance for the cheaper stuff. Again, though, unless there is a mandate, I think you would likely see similar adverse selection problems.

I think the solution that makes most sense is for the government to cover all costs imposed by supernatural disasters. The public would pay higher taxes, which would go towards a fund to cover these sorts of damages. You might argue that this could engender a moral hazard problem, as pointed out by commenter, Carl. I doubt this would be a huge problem. I don't see what kind of insurance fraud anyone is willing to commit that would pit them against the Joker. There are potential lives at stake with supernatural disasters. I don't think that the people of Metropolis would start flocking towards highly concentrated super-active areas simply because they know the government will pay for their toaster.

I tend to view this government spending as not all that dissimilar from national defense and security spending. For the most part, superheroes are government-approved (with exception of vigilantes like Batman). Consider the case of Superman. The Metropolis government, law enforcement agencies, and public have no problem allowing him to take residence in the city in exchange for their protection. It is a contract between him, the public and the government: Superman has free reign to conduct his business against evil-doers, while the police turn their heads barring any significant indiscretions. In exchange, the city is protected under the Man of Steel's umbrella. The cost of this security is the cost that the public pays towards repairing the negative externalities (destruction).

Now if only we had some way of curbing the destruction caused by Superheroes. Perhaps we do.


ajay said...

I suppose the point of the national-defence analogy is that Superman's protection is more widespread than the negative effects of his presence. Someone living in Cleveland will still benefit from his protection against extranormal threats to the entire country, or for that matter the entire world. But only someone living in Metropolis will run the risk of being flattened when the supervillain of the week tries to take on the Man of Steel. Superman, essentially, is the equivalent of a nuclear weapons factory or a flight test centre: your defence needs them, but you don't want to live next to one.
Presumably, Metropolis is subsidised to avoid a wave of NIMBYism from its residents!

I still think your adverse selection point isn't as strong as you think. Property insurance rates aren't generally cross-subsidised, because that opens you up for being undercut in the markets that you're overcharging. The premium for insurance should be (cost of property)*(probability of destruction)+ (profit margin/overhead), regardless of how many other properties the insurer also covers. Each individual policy should pay for itself. The only way this wouldn't apply is if insurers were mandated by the government to cover everybody - but this isn't the case for property insurance. If Lloyds of London thinks the Daily Planet building is too risky to insure at any premium, they're at liberty to say "sorry, chaps, you're on your own" and walk away.

Fractal said...

Right, adverse selection is really only a danger if the residents are aware of hazards that the insurer is not. (Or if it is illegal for the insurer to charge different rates based upon expected risk.)

I can't picture what this would look like in a superhero scenario - maybe knowledge of the secret identity of the hero or villain who lives next door? That seems rare enough that it shouldn't be a major economic factor.

Chris said...

No, the moral hazard comes with private insurance; what is to stop the Joker shorting stock in the company before a rampage? The Kingpin has already done something similar- see Damage Control on Wikipedia:
"... the sale of Damage Control had been a plot by Fisk to buy back the company for cheap. During the events of Acts of Vengeance (an event Fisk helped organize), massive damage was done to the city and Fisk made a large profit when Damage Control was hired to repair the damages.
(In later appearances, Hercules is seen working with Damage Control, on one occasion serving a community service sentence levied as punishment for a drunken rampage. Later, Hercules becomes a full-fledged employee, forced to earn a living after the Constrictor successfully sues the demigod for injuries incurred in his apprehension.)

Corruption at the top

The super-villain Nitro, who blew up the town of Stamford, killing hundreds and starting the Civil War, reveals that a "Walter Declun", has provided him with Mutant Growth Hormone. Via Namor, Wolverine learns Walter is the CEO of Damage Control, Inc. A brief scene shows that Walter and one other employee of the firm are complicit in using Nitro to boost the firm's profits.

This leads Wolverine to Anne-Marie Hoag, Damage Control's President. Anne-Marie reveals that Declun and his investors took a controlling share of the stock after the company went public to obtain more funds. D.C. has also obtained the Stamford reconstruction contract and the contract to train and evaluate registered super-beings."
It's hard to see that government could do worse than that.

ajay said...

what is to stop the Joker shorting stock in the company before a rampage?The infallible vigilance of the SEC? No, but seriously, folks... more likely the fact that the Joker is too insane to think of something like that, and certainly too insane to have a broking account. The Penguin, yes.

Fractal said...

Moral Hazard and Adverse Selection are separate issues. Moral Hazard is people behaving poorly after they've been issued insurance. Either monitoring the client or else carefully worded contracts are needed to prevent this.

Adverse Selection is when only the people who are disproportionately likely to suffer damages choose to buy insurance. When the people buying insurance do not have hidden information, contracts that charge based upon the expected risk and damages can solve this problem.

Scott said...

Don't forget that Superman presumably puts a fair amount of (unpaid) time into superspeed reconstruction of damaged buildings and infrastructure, thereby saving both the insured and the insurance company (or government) much of the assumed costs of being in the middle of a Metropolis superfight. This probably mitigates the total overhead for such insurance coverage in Metropolis, and allows Superman the use of his superspeed construction skills while not putting him in competition with normal construction companies - he's only doing work that wouldn't be necessary if not for collateral damage from his never-ending battle.

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Compare insurance said...

Absolutely love the analogy man. Superhoroes and Insurance haha....

Also, where did you get that awesome superman pic!
Keep up the great writing, you're on my BLOGROLL

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