Um, this is wrong. The effect of insurance on behavior is called “moral hazard”, and it is a market imperfection. People who contract for insurance will be best off if they minimize resulting changes in behavior, and insurance contracts with severe moral hazard issues are simply not traded. (For instance, unemployment insurance is not traded on the private market.)
That’s only true for cases where the insured has significant influence over whether the insured event happens. That’s not the case for legislation, unless you’re an influential legislator or lobbyist; and, to the extent that moral hazards cause a problem there, it still works to make the legislature impotent (since they can no longer trust each other not to use their votes to game the prediction market).
And I think you’ve significantly overstated the impact of moral hazard problems: there are numerous instances of insurance contracts where the insured has significant control over whether the insurer must pay out—the solution is to make sure the payout doesn’t fully return the insured to their indifference curve (e.g. through deductibles), not for the market to fail to exist. Otherwise, how could there even be liability insurance?
EDIT: Easter egg: see if you can find an internet article by me arguing the opposite of what I’ve said here. Don’t embarrass me further by posting it when you find it.
What’s “the insured event” here? If it’s the enactment of legislation, then yes, it is possible in principle that insurance will affect the market for laws, by shifting risk to those most able to bear it. If it is the behavior of people who would be affected by legislation (say, a breach of some kind which gives rise to liability), then my above point stands: the “impact of moral hazard problems [is] reduced” iff insurance does not change behavior much.
Liability insurance only covers negligence and strict liability, not intentional torts; and insurers seek to minimize their payouts by (a) imposing deductibles and (b) monitoring their clients’ observable precautions. In some cases, insurance will actually enhance the incentives inherent in tort law, by shifting part of the risk of negligence to a third party which can specialize in monitoring against it; but this is a matter of technical efficiency.
Um, this is wrong. The effect of insurance on behavior is called “moral hazard”, and it is a market imperfection. People who contract for insurance will be best off if they minimize resulting changes in behavior, and insurance contracts with severe moral hazard issues are simply not traded. (For instance, unemployment insurance is not traded on the private market.)
That’s only true for cases where the insured has significant influence over whether the insured event happens. That’s not the case for legislation, unless you’re an influential legislator or lobbyist; and, to the extent that moral hazards cause a problem there, it still works to make the legislature impotent (since they can no longer trust each other not to use their votes to game the prediction market).
And I think you’ve significantly overstated the impact of moral hazard problems: there are numerous instances of insurance contracts where the insured has significant control over whether the insurer must pay out—the solution is to make sure the payout doesn’t fully return the insured to their indifference curve (e.g. through deductibles), not for the market to fail to exist. Otherwise, how could there even be liability insurance?
EDIT: Easter egg: see if you can find an internet article by me arguing the opposite of what I’ve said here. Don’t embarrass me further by posting it when you find it.
What’s “the insured event” here? If it’s the enactment of legislation, then yes, it is possible in principle that insurance will affect the market for laws, by shifting risk to those most able to bear it. If it is the behavior of people who would be affected by legislation (say, a breach of some kind which gives rise to liability), then my above point stands: the “impact of moral hazard problems [is] reduced” iff insurance does not change behavior much.
Liability insurance only covers negligence and strict liability, not intentional torts; and insurers seek to minimize their payouts by (a) imposing deductibles and (b) monitoring their clients’ observable precautions. In some cases, insurance will actually enhance the incentives inherent in tort law, by shifting part of the risk of negligence to a third party which can specialize in monitoring against it; but this is a matter of technical efficiency.