Mandates, subsidies and political semantics
When the U.S. Supreme Court decided the fate of the Affordable Care Act’s individual mandate in 2012, the nation was gripped by an intimate and personal political drama worthy of Broadway or, at least, General Hospital.
Debates about insurance mandates and subsidies were elevated from obscurity to the top of the national discourse. Suddenly, having an opinion about the appropriate tools for the federal government to implement its health-care law was crucial. Partisans entrenched themselves into “pro-mandate” and “anti-mandate” camps. When Chief Justice John Roberts handed down the court’s opinion, he left both camps confused.
Mandates are seldom popular, but the legacy of that decision was to focus public vitriol at mandates generally, even in areas where a mandate might make sense. As a case in point, to stimulate and increase California’s earthquake insurance take-up rate, some form of a mandate might be necessary to adequately secure billions of dollars in mortgage loans currently backed by taxpayers.
California’s largest provider of earthquake insurance, the California Earthquake Authority, has a policy take-up rate of only around 10 percent. The nature of the policies themselves might be partly to blame for that low take-up rate. The coverage is expensive and the deductibles are quite high. Given public perception that the frequency of seismic events is low compared to other covered perils, and that most earthquake damage is unlikely to pierce the deductible, many find it hard to imagine the insurance is worth the expense. Whatever the reason, something must be done to broaden the pool of insureds.
One alternative is an earthquake-insurance mandate; the other is a taxpayer subsidy of earthquake risk. Each approach promises to bring more of the public into the earthquake insurance risk-pool, but they would achieve that in markedly different ways.
Mandate:
An earthquake-insurance mandate would achieve lower earthquake insurance premiums by expanding the pool of those insured. If needed, pre-funded catastrophe risk instruments would allow for an immediate infusion of contractually designated private capital after an event occurs.
Beyond the practical benefits of an earthquake insurance mandate, it is also desirable because the conduct mandated is limited and subject to private choice. Property owners would be required to obtain coverage as a condition for certain loans. Taxpayers are not placed at risk, or even implicated by an earthquake insurance mandate. Unlike the ACA mandate, in which the absence of coverage triggers a penalty, an earthquake insurance mandate would be triggered only by dealings with a public mortgage entity. This would have the added benefit of reducing mortgage-default risk that is currently shouldered by taxpayers.
Subsidy:
Subsidies, in the form of government guarantees of principal and interest on post-event bonds, serves the function of transferring risk from one group (insurers and insureds) to another (taxpayers) to achieve lower premiums. While a bond issued after an event has the advantage of being tailored to that event’s specific cost, subsidizing earthquake risk by incurring debt after an event potentially places all taxpayers on the hook for those most vulnerable and least responsive to the risk.
A post-event bond approach that implicates Californians who maintain only a nominal relationship to the risk of earthquake loss is particularly problematic. While it spreads risk, it does so in a manner that abrogates private decision-making processes. There is no reason for homeowners in Siskiyou County to pay a surcharge on their insurance because homeowners elsewhere chose to forgo earthquake coverage.
Given the shortcomings of a subsidy approach, the perception of the political hurdle posed by a mandate must be staggering. And yet, mandates and subsidies are not that dissimilar. Broadly speaking, insofar as it compels economic behavior without a relationship to the risk of loss, a subsidy is itself a mandate of a different kind.
It is ironic, then, that the earthquake-insurance subsidy, which will command broad-scale public involvement, does not carry the stigma of a mandate. Perhaps the largest hurdle to increasing the earthquake insurance take-up rate, while respecting the agency of taxpayers and property owners, at is a semantic one. Claiming that a subsidy is the only way forward because a mandate is a political nonstarter disguises the true philosophical distinction between a mortgage requirement and a taxpayer backstop – individual agency vs. public obligation.
