The legislative proposal by Warwick/Cranston Democrat state representative Joseph McNamara has made the news rounds, but it deserves a stronger point to be made. The press release says he’s “drafting new legislation that would help businesses hit hard by the COVID-19 crisis by guaranteeing that business interruption insurance would cover their losses regardless of policy language.”
It’s kind of a dishonest move. Insurance companies charge their clients rates based on the risk involved in their policies. These charges go toward a fund to cover the estimated payouts based on the risk for each thing that’s insured. There is competition in insurance just as there is in every other private-sector market, so companies can’t charge fees that are so high they’re disconnected from this relationship to payouts.
If the General Assembly and governor pass a law that requires insurance companies to pay for events that were deliberately left out of the calculation of risk, the insurance companies will have to find that money somewhere. One way or another, that means distributing the cost among other clients. The complications of reinsurance (insurance for unexpected insurance payouts), do not change this fundamental fact; they just mean the spread is broader.
If government officials want to insure Rhode Island businesses against a loss during a crisis, they should do it the more-honest way of using government funds. The legislature and governor should make the statement that this is a worthwhile priority and will therefore either displace lesser priorities or require tax increases.
Of course, cost comes at a political price, which politicians prefer to avoid. Thus, these sorts of mandates that make other people pay for government policies (aka hidden taxes) ensure that the McNamaras of the state can pat themselves on the back for giving away money while hiding the fact that it has to come from somebody.