When I called Don Boudreaux yesterday, he was awaiting a call from his insurance company after the condo above him had leaked water into his condo. We got talking about insurance and I remembered my first interaction with my auto insurer, State Farm.
I was a fairly safe driver, so even though I had driven from age 16 on, I had my first fender bender when I was 31 or 32. I was crossing a bridge from Washington, D.C. to Arlington, VA and I crashed into a trailer being hauled by a truck. The other driver and I agreed that I had not damaged his trailer but I had damaged mine, and it was entirely my fault. My mind had wandered back to this or that work issue.
With a lot of trepidation, I called up my insurer, State Farm. I talked to the person as if I were talking to my father and expecting to get yelled at. He or she didn’t. The claims person calmly took my information and told me how to go about getting a repair estimate.
This response by the insurance company representative may not surprise you and it would no longer surprise me. That’s the point. Sometimes we bring into the bigger world our mindset from growing up in a family and expect the people in that bigger world to react the way family members might.
But State Farm was providing a service that it was charging for. The company had a strong incentive to tell its employees to treat their customers professionally.
What I remember still is how good I felt from that interaction compared to how I had expected to feel.
READER COMMENTS
Jo VB
Jun 9 2021 at 3:13am
Although they probably did raise your rate afterwards.
Pierre Lemieux
Jun 9 2021 at 9:54am
The insurance company and its competitors would only do this if they believed that the accident disclosed a higher risk of the driver at fault than was previously estimated. Insurance is not a prepaid budget plan (except that there is something of that in certain forms of insurance such as health and dental).
David Henderson
Jun 9 2021 at 11:03am
Well said, Pierre.
I would add that if the State Farm actuaries are any good, they’re Bayesians through and through. My one accident after 15 or 16 years accident-free could well cause them to adjust their estimate probabilities.
Evan Sherman
Jun 9 2021 at 11:40am
Who needs those yucky old familial or paternalistic style socio-cultural ties? The good ol’ cash nexus saves the day again! 🙂
In seriousness, though, a good insurance company delivering on its contracted services without judgment is a great example of morally agnostic markets making things more efficient and thus providing value. That said, it’s not obvious to me that these market mechanisms should be displacing social and cultural institutions that do facilitate moral judgment, guilt, redemption, etc. For example, while it’s entirely appropriate that DH’s insurance company did not exact morally-tinged punishment on him for his less-than responsible and dangerous driving behavior, DH probably should have felt at least a little guilty about that behavior. Bad driving endangers lives needlessly, so a) you personally need motivation to avoid it so that they minimize their personal risks and b) society at large needs tools to disincentivize it so that minimizes the loss of productive members. (BTW, obviously this applies to my own at-fault driving accidents too.) Guilt is unavoidable, it’s not all useless, and we should respect institutions that help us manage it. If DH felt and expressed guilt to himself, to his family, to the other driver, etc. – more so that he did the insurance company – that’s not bad.
Economic incentives governed by markets (e.g. paying for financial risk management) are part of the picture, but that doesn’t mean that more traditional moral sanctions and attendant behavoral psych pressues should be poo-poo-ed. We can and should keep our social / moral institution peas separate from our economic mashed potatoes, but that doesn’t mean we shouldn’t be eating our peas.
David Henderson
Jun 9 2021 at 11:44am
I agree.
And, by the way, reasoning about incentives suggests that one of the worst things traffic cops can do is enforce seatbelt laws.
Grand Rapids Mike
Jun 11 2021 at 11:19am
Regarding the comment ” the worst things traffic cop could do is enforce seat belt laws” . Whut ? Assume this is satire, or is this part of your plan for population control.
David Henderson
Jun 11 2021 at 4:12pm
No, it’s neither satire nor part of a plan for population control.
When people wear seatbelts, they drive more intensively: faster, closer to the car in front, etc. That imposes negative externalities on others: people in other cars, pedestrians, and motorcyclists.
Requiring people to wear seatbelts, if effective, causes them to wear seatbelts more often. And that leads to more intensive driving and bigger negative externalities.
Grand Rapids Mike
Jun 11 2021 at 6:24pm
Well that’s an overstatement. While not a fan of government telling me what to do, I think seatbelts, air bags and better car designs have on net saved lives, even though they potentially promote risky behavior, especially among boys under 18. Will need to check data but deaths per mile in cars are at all time lows.
Grand Rapids Mike
Jun 11 2021 at 6:35pm
Also deaths per 100 million car miles declined from 5 in 1960 to about 1.10 in 2019, according to Wikipedia.
Bob
Jun 12 2021 at 2:50pm
I think David is referring to Gordon Tullock’s Spike.
If you lower the cost of unsafe driving by making it less likely to get injured or die in an auto accident, you get more unsafe driving behavior.
Watch this video and see how vastly improved vehicle safety has become over the years. The cost of unsafe driving has gone down massively over the past decade. It’s quite incredible.
I see the same incentives at play where I work. I design production equipment for aircraft assembly. Some of this equipment has platforms that move vertically to raise workers high off the ground. Workers are frequently going up and down, in and out of the lift to retrieve tools and parts.
OSHA walked through a few years ago and mandated that we had to have an interlock system on the doors to these raised platforms. If the platform is raised, you can’t open the door. They were concerned people would walk off the lift when it was raised, though we had never once had that issue.
We installed those systems at their request. A few months later a guy on third shift disabled one for a reason we never did figure out. Not even 8 hours later we had a worker walk out the lift while it was 20 feet in the air. Somehow he only broke his leg.
If you make it cheap to engage in unsafe behavior, whether that’s texting while driving or not looking down while you’re in a lift because the door is supposed to know whether you’re in the air or not, you get more of that unsafe behavior.
Jon Murphy
Jun 9 2021 at 11:46am
David isn’t saying that guilt (or other moral sentiments) have no place whatsoever. The insurance company is not the moral arbiter here; their job is to cut a check. As you note, family, friends, or other social acquaintances are the moral arbiters.
It would be inappropriate for the insurance company to lecture him. Likewise, it would be inappropriate for his friends, family, etc., to ignore reckless driving. To paraphrase Adam Smith (Theory of Moral Sentiments) and Fonna Forman (Adam Smith and the Circles of Sympathy), there are a number of social circles we run in. Each of them have different obligations and enforce different values. The relationship with the insurance company is the most mundane: that of justice. Only guilt should be involved there if some injustice occurred (one of them failed to uphold their end of the contract).
Evan Sherman
Jun 9 2021 at 12:12pm
Agreed.
For what it’s worth, sometimes people fall into a straw-man conception of libertarian leaning political and economic thinkers as inhuman robots happy to demolish all pre-modern institutions. As real economists, ya’ll probably encounter this straw-man regularly. Making disctinctions to keep the straw-man at arms length is always worth doing in my eyes. But yes, to your point, I didn’t intend to imply that DH is some kind of nihilistic libertine or anything.
Jon Murphy
Jun 9 2021 at 1:52pm
My mistake for misunderstanding!
Dylan
Jun 11 2021 at 8:51am
Thought about this post when I read this article today about United Healthcare wanting to retroactively deny payment for ER visits.
https://arstechnica.com/science/2021/06/biggest-health-insurer-plans-to-deny-er-bills-if-it-doubts-you-had-an-emergency/
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