Insurer of Last Resort
The preferred political ideology in which one approaches the proper functioning of a government run insurance program or perhaps more fundamentally, the proper relationship between government and the market, is significant for considering “actuarially sound” as a criterion for judging the program’s successes and failures. The standard quip is that a government run insurance program is or should be a “market of last resort.” Here, the normative though technical sounding concept of actuarial soundness meets the equally vague though meaningful sounding concept of a “market of last resort.”
The "Last resort" concept
While much of insurance markets of last resort critique focus on critiques of the way that they are run, the notion that there is one technically "right" way to do a market of last resort does not seem supported. In their study of risk regulatory regimes, Hood et al, explain
There is, however, no single correct way of conceiving risk regulation regimes. No one has ever seen a risk regulation regime. The concept has many possible dimensions, and the balance of emphasis across those dimensions is bound to vary according to eh analytic interest of each observer (p.12).
The concept of a last resort market has historical roots in the 1800’s as scholars argued for the use of central banks as lenders of last resort (LOLR) to ensure economic stability. Interestingly, Milton Freedman, ideological figurehead of laissez faire policy and neoliberal movement argued that the unwillingness of central banks to act as LOLRs contributed to the severity of the Great Depression (Freidman and Shwartz). This historical discussion about the appropriate use of an LOLR, if at all, continues today (e.g. here) and suggests that decision making about markets of last resort has long been rather ideological.
Writing for a popular audience, political economist and former member of the Belgian parliament, Paul De Grauwe, outlines the common criticisms of LOLR.
- Risk of inflation: too much money in circulation
- Fiscal consequences: commitment of future taxpayers to the service of debts, no mixing of monetary and fiscal policy
- Moral Hazard: incentives government to issue too much debt
While insurance last resorts may not be faulted for inflation (at least that I know of), critics commonly lean on the last two concerns. In the case of fiscal consequences, critics argue that losses exceeding the market’s ability to pay obligate future taxpayers to paying off the debt; in the case of moral hazard, they argue that last resort insurers incentive the creation of too much risk. The former criticism neglects to recognize that all insurance activity carries the risk of public exposure to loss as when insurers become insolvent government’s must find ways to ensure indemnification, otherwise are people unable to repair property and neighborhoods demise. In addition, a rash of foreclosures causes a potential series of problems from a loss of equity at the household level on up a macro level. The latter criticism overlooks (or makes light of) a classic fundamental that all insurance activity creates moral hazard. The entire purpose of certain forms of insurance, particularly in mandating certain insurance, is to encourage the start up and continuation of risky activity that one would not otherwise engage (e.g. buying a home and driving a car).
Insurers of Last Resort as Artifacts of Public Policy
Insurers of last resort arise where government perceives a need for insurance and the private market is unable of unwilling to provide cover- at least at costs that are publicly acceptable (i.e. affordable). In turn, government run insurance programs, that is, markets of last resort, are also regarded (especially in the US) as residual markets. These markets handle the residual population those left over after the private market deals with the risks they choose to at prices the public will accept. What is meant by unable to obtain coverage on the private market or costs that are unaffordable is often quite contentious. That which is simply distasteful to the public leading to outcry and that which threatens the stability of the larger economy as individuals are unable to meet the demands of their cost of living. Either poses substantial political risk to elected policymakers.
Decisions made about managing residual markets- who is part of the market and who is not- has real world outcomes. It divides those of more "normal" risk and those of "high" risk. It results in access to certain public resources for some and not others. In this sense, it is akin to another of public policy decision making where inclusion is a concern and access to resources (and responsibility for loss) is allotted.
The expectation for residual markets to function in actuarially sound ways demands that residual markets heed the norms and values commonly accepted on the private market. Yet the residual market itself is a carefully crafted artifact of public policy specifically intended to intervene in the insurance market when its norms and values conflict with those of the public interest.
Constructing a residual population that is deserving of its services is no different from more traditional debates about political inclusion. Placed in this context, invoking actuarial soundness as a technical ‘trump card’ is an effort to place financial market values and priorities above those of the public.