Better Insurance Policy: Applied Technology-Oriented Policy

• John Vandivier

This article discusses a way to dramatically improve insurance policy in the United States.

Did you know that <a href="http://fee.org/freeman/detail/health-insurance-is-illegal">selling real health insurance is illegal in the United States?

U.S. law prohibits discrimination of patients by known conditions. Real insurance operates by spreading risk factors across a pool. If a person is known to have a condition then it is not a risk which can be spread. Instead, what passes for insurance in the U.S. today is simply prepaid healthcare.

I have a background in economics and politics. My political experience ranges from the campaign side to the policy side and my primary interest is to improve national and international economic policy. As such, I often get a puzzled look when I tell people that I work as a professional web developer.

There are several links between economic policy and technology, but a few rise to the top:

  1. Technology is practically the best way to alter policy.
  2. Certain advanced technical skills in economics, such as big data manipulation and programming, are directly applicable to programming and web development.
  3. Technology is theoretically one of the best ways to improve the economy. TFP does not exhibit diminishing marginal returns.
Those three factors plus one other (better employment prospects including pay) are the reasons I shifted from a professional focus on economics and policy towards IT, but #2 is the one I frequently bring up in conversation because the others are a bit complex for the non-economist.

This article will focus on #1. Why is technology practically the best way to alter policy? The reason is because policy and political systems are systematically backwards looking and slow compared to markets and technology. This creates a regulatory gap which will overtake the social system in the long run.

Policy is inherently backwards looking because it is hard to regulate things that don't exist. Yes, policymakers can try to forecast developments and regulate with anticipation, but forecasting is a difficult and limited science. Innovation is not a predictable thing, in particular over the long run. So policymakers may do a bit of regulation in advance but this is not their forte.

Political systems, or at least modern monopolistic states, are inherently slow due to all sorts of reasons. Others and <a href="http://www.afterecon.com/economics-and-finance/the-triple-cost-of-government/">I have written volumes on this subject in the past and I won't cover it in detail here. The theory matters less than the facts here though, and the data is clear that government does things slower and more costly than the market. It is also poor at innovating inside its own sector, let alone keeping up with and regulating the private sector.

Because centrally planned policy and modern political systems have this inherent inefficiency, a regulatory gap occurs. A regulatory gap exists when:

  • A regulation does not exist.
  • A regulation does exist but it is infeasible to enforce.
There is also a third sort of law which enables limited freedom and can be leveraged by technology, although technology is not the source of it. This may be called the Squabbling Regulatory Gap:
  • A regulation or law exists but the regime in power either does not want to enforce it.
  • A regulation or law exists and the regime in power does want to enforce it, but it is of a sufficiently low priority that the supply of enforcement is less than the demand for non-enforcement. As a result, enforcement is outpaced by the market.
Basically, the growth rate of the set of unregulated things, including both items and actions, is larger than the growth rate of the set of regulated things. The set of unregulated things constitutes the regulation gap, and this set will eventually dominate the set of all things.

The mechanism of this dominance is the continual superior growth rate of unregulated things. This comes from innovation, or new technology. The internet, torrent, cryptocurrency, and 3D printing are examples of recent technologies with direct policy implications.

Crowdfunding is another example of a technology with policy implications. Crowdfunding and crowd contracts can be used to create distributed insurance. This distributed insurance would have at least three advantages over traditional insurance:
  1. Market stability through crowd or distributed nature. If any insurance provider were to fail it would negligibly effect the whole market. Currently, insurance is centralized and this creates socio-economic instability. AIG's failure was key to the 2008 financial crisis, for example.
  2. Crowd contracts are infeasible to regulate through central political systems. Therefore, crowd insurance would be allowed to discriminate by pre-existing conditions or whatever else they felt like using. This would allow true insurance resulting in better efficiency, lower prices, better coverage for consumers, and so on.
  3. Crowds are more efficient than traditional firms for reasons independent of policy. Some reasons include better competition, lower overhead, lower profit demands, and sometimes additional benefits from scale or information. This means better efficiency and lower prices, but for reasons independent of point 2. Evidence includes the fact that crowd lending is achieved at lower cost and 3D printed objects are cheaper.
The conclusion is that crowd insurance would be more efficient than traditional insurance to start with, but it would also be immune from regulation. Some firms have begun exploring the crowd insurance space, but none have yet to embrace a truly decentralized and encrypted crowd which would eliminate regulation.