We have such a hole in our understanding of how insurance once worked, and would work, in an economy, if it were allowed to do so.
First off, insurance has to be voluntary, this is absolutely key. No one must ever be required to buy insurance by any government. Now, someone financing the construction of a building may require insurance as a condition of financing, but that is different, merely conditions of a contract which one may freely enter or reject. Not only is it a bad idea, mandatory insurance violates our constitutional freedom of association and freedom to assemble.
Now let's look at insurance as it once was: arbitraging present cost of risk against future cost of risk in a dynamic milieu in which innovation constantly lowers the cost of risk. In so doing, the cost of innovation drops. As cost of innovation drops, the expansion of goods and services, by division of labor widens, ever expanding true wealth.
Let me unpack that: in say 1720 two of ten ships that left Plymouth for the Orient never returned, so there was a 20% loss to insure against. So a premium of 25% would be profitable (a loss of 20% with a profit of 5% means the insurers made 25% on their money). Insurance companies then began offering better rates of say 22% if the sailing ships employed better design, scientific navigation practices, plus new weather and route knowledge, and finally better results through humane crew management. by 1750, one in ten ships were being lost, the improvement due to he insurance company demanded changes. So a 22% premium was cheaper for the owners of the ships, yet the insurance compaines made even more on their money! (10 point loss left 12 point profit, now making 120%, not 25%) Of course competition forced insurance rates down, costs dropped faster than premiums.
As cost of risks dropped, more people went into trade, we began seeing more and better products at cheaper prices, so more could have access to material goods. Insurance is critical to this process, at least free market insurance. Now apply that to every industry, not just shipping.
Today insurance is about pricing static amortization rates. Instead of tracing AIDS back to its source, insurance today merely resists covering gays until government relents and allows added cost of risky behaviour to insurance premiums. In a free market, insurance would have traced the cause of AIDS to its source, and then competed to get cures and malaise management costs as low as possible....
Bring back free market insurance.
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