Sorting Out Insurance Ethics, Post-Katrina

Professor Austan Goolsbee

hide captionProfessor Austan Goolsbee says there are several solutions to the dilemma posed by helping Katrina survivors who had inadequate insurance.

In Louisiana, some people who have homeowner's insurance are actually receiving LESS money to rebuild after Katrina than those who had NO insurance. University of Chicago economics professor Austan Goolsbee talks with Scott Simon about the ethics of insurance.

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SCOTT SIMON, host:

We were listening to coverage of the Katrina anniversary this week, and one story in particular caught our ear. It was about the way that federal rebuilding grants are being distributed. There are as many as 120,000 homeowners in the Gulf region who've applied for the grants.

Louisiana, it turns out, subtracts any other money you might get from, say, insurance from your federal grant. And we wondered whether this might encourage people not to buy insurance in the future. University of Chicago economics professor Austan Goolsbee has thought a lot about this proposition. Joins us from the campus there. Thanks for being with us.

Professor AUSTAN GOOLSBEE (University of Chicago): My pleasure.

SIMON: Now, this predicament I've described is an example of something I gather is called moral hazard. Could you talk about that?

Prof. GOOLSBEE: Yes. Moral hazard has to do with thinking about what are the implications of bailing somebody out today. So if you say, all right, we had a hurricane, we'll pay for your damage, even if you didn't have insurance, it gives people and incentive perhaps not to get the insurance, because they say, well, if it's going to be that bad, of course the government will bail us out. It's not exclusive to hurricanes.

SIMON: For private companies, for that matter...

Prof. GOOLSBEE: Sure.

SIMON: ...it's been suggested that when the government steps in to bail out a private company it's simply encouraging a failing business.

Prof. GOOLSBEE: Right. We're always going to want as a society and as individuals to bail out the helpless when something goes dreadfully wrong, like happened in Hurricane Katrina. But a lot of people argue that we have gotten into a situation where we're encouraging people to take unnecessary risks.

So you've got people living in places, say, right on the flood plain of the Mississippi where they repeatedly have floods, or those people who build their houses on the cliffs in Malibu, where they - seems like every two years they have a mudslide, the house falls down.

Actually, the joke in California is they say, well, you don't need any earthquake insurance because if the big one ever hit, it would bankrupt all the insurance companies anyway and the government would have to bail everyone out.

SIMON: You know, it's funny, professor, you should volunteer as a joke because that's exactly the next serious question I was going to ask you.

Prof. GOOLSBEE: Yeah. I mean it's a - you know, it's one of those sad jokes. If you look in the Bible there is great discussion put to Jesus about, well, what if somebody's been a sinner their whole life and then they see the error of their ways on their deathbed. Should they be treated the same as somebody who's been working diligently to be righteous their whole life?

SIMON: I believe Jesus would say yes, but I'd be reluctantly to drag what would Jesus do into a conversation about insurance rates. That being noted, can I try and get you to talk about the issue of fairness at the same time? Because people that buy insurance will necessarily feel that they've been dealt with unfairly.

Prof. GOOLSBEE: It's very much like saying, hey, I saved every year for the last 20 years up for my retirement and now people are retiring with nothing, and we're going to have a policy of, if you have nothing at the time of retirement then we're going to give you something, but if you have saved, we're going to give you nothing.

SIMON: Is that one way of addressing the problem? Say to a homeowner, well, you get bailed out this time, but if you use that money to rebuild in exactly the same spot and exactly the same thing happens, we can't do it?

Prof. GOOLSBEE: Yes, that is one way to address the moral hazard issue. A second way to do it would be to say, all right, we know that if something really bad happens, we're going to want to help people who have been really hurt. And so let's, for example, require everybody to get insurance.

You could envision the government announcing a policy of the government will help everybody get homeowners insurance for less than what it normally costs. But then if something goes wrong, you're really going to be on your own.

SIMON: Austan Goolsbee, professor of economics at the University of Chicago, thank you very much for being with us.

Prof. GOOLSBEE: My pleasure.

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