Supernatural Disaster Insurance 2: Insurance Harder

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.