By Bill Crawford
Why is the federal government in the insurance business? Crop insurance, flood insurance, medical insurance, deposit insurance, mortgage insurance, and more are government insurance programs.
They have formal names, of course.
The Federal Crop Insurance Corp. covers major agricultural crops. The National Flood Insurance Program covers properties in flood prone areas. Medicare provides health insurance to the elderly. The Federal Deposit Insurance Corp. insures deposits in the U.S. banking system. FHA Mortgage Insurance covers homeowners with Federal Housing Authority guaranties.
So, why is the federal government in the insurance business?
Simple….the free enterprise, private sector will not provide this coverage or will only provide it at prohibitive costs. And, over time Democrat and Republican officials, alike, have decided these important needs should not go unmet, so government should fill the gap.
Our food production industry says it cannot exist without crop insurance. Prior to Medicare sudden or prolonged illness would financially devastate too many elderly families who had trouble getting or affording coverage. In the past, banks failed causing depositors to lose all their savings; FDIC insurance prevents that and avoids panic withdrawals. FHA Insurance allows young and low-income families to obtain mortgages with less than a 20% down payment, encouraging home ownership. And so on.
Okay, but why won’t private companies provide the insurance?
Private insurance companies exist to maximize profit. They do so by minimizing risks and avoiding “adverse selection.” Adverse selection occurs when most of the farmers, people or businesses who purchase insurance are likely to file large claims at the same time. Insurance companies profit by spreading risk over large pools where the probability of large numbers of big claims at the same time is minimal. The larger the pool, the lower the risk. The more members of a pool who pay for but don’t use insurance, the more profit the private insurer makes.
Okay. States have insurance programs. Why don’t states provide this insurance?
The basic answer is again pretty simple – states don’t want to incur the financial risks these programs pose either. For example, massive crop failures in a state like Iowa would bankrupt a state crop insurance program and put a whammy on the state if it guaranteed the program. Spreading risks and costs to more states and bigger pools makes sense.
The federal government’s role in providing insurance is a hot topic in this year’s elections. In farm states, the existence and costs of federal crop insurance are issues. The ever-growing cost of Medicare and who should provide it, especially for future generations, – the government or private insurers – are issues.
Still, whenever a politician says let free enterprise insurers cover something, not the federal government, understand there are many unprofitable risks private insurers really won’t cover.
Bill Crawford firstname.lastname@example.org) is a syndicated columnist from Meridian. Write to him at 1124 Windmill Drive, Meridian, MS 39305.