Insurance part II – why competition isn’t everything.

This post is going to be simple and straightforward. Intense competition is not the appropriate solution for all the challenges we face. Insurance is one of them.

The insurance industry is regulated for a reason. The industry has a large informational advantage over its customers (most of the time), and failure by a firm can have devastating effects on its clients. You are counting on a back-stop that needs to be there. Life insurance, Home, Auto all need to have solid firms writing the policies, investing the premiums, and being in business during the time of need.

Purely competitive markets could have ill-timed bankruptcies leaving many clients out in the cold. Failure is part and parcel of a competitive market. By contrast, risk sharing is communal in nature, and very powerful when properly structured.

We still need some competition to help drive down costs and inspire innovation. However, it is unlikely that a purely competitive/highly de-regulated market is going to benefit the general public. It may work for television sets or other manufactured goods, but unfortunately, a highly competitive insurance industry might not deliver the outcome we are depending on. Wanna risk your little guy’s future on it? Didn’t think so.