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War Insurance: World Peace Through Capitalism

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The service provided by the U.S. military, and probably most of the world’s militaries, is commonly described as “national defense” or “protecting freedom.” The Department of War changed its name to the Department of Defense decades ago. From this, we might infer that what the public wants is not a globe-spanning empire, but insurance against war and terrorism. We want to be secure from aggression.

As Rothbard points out:

A supply of defense services on the free market would mean maintaining the axiom of the free society, namely, that there be no use of physical force except in defense against those using force to invade person or property.

A free market in defense and military services could lead to some strangely familiar institutions, but such institutions would be turned to entirely different purposes than in today’s world. Following are some ways in which a free market in defense might function, and some of the institutions that would likely form. For simplicity, we assume that both war insurance and security services are provided by the same company, though in actuality the security work itself could be outsourced to third parties.

FINANCING

Because war insurance companies would be financed by voluntary payments rather than taxation and inflation, they would have to operate within the market constraints of profit and loss. The cost of war would be a loss. This is just the opposite of politicians and defense contractors today, who grow rich from war precisely because it provides an opportunity to milk the taxpayer, who is forced to pay the bill regardless of whether he supports the war policy or not. Tax-funded public relations efforts often help to sell the need for the war.

In a system of freely competing war insurance companies, the major producers of war would profit more from peace than war, a reversal of the current incentive structure. Soldiers for insurance companies would always have a single clear mission: put down aggression and protect the innocent.

Because providing protection against war is a specialized, capital-intensive job, potentially requiring anything from tanks to aircraft carriers, war insurance might be purchased primarily as reinsurance by other property insurance companies. These “retail-level” insurance companies would then be free to focus on protecting their clients from crimes like theft and violence, as well as natural disaster. Because of the expense, an entire continent might support only a few companies focused on war, but these could also reinsure themselves through each other and through other war insurance companies located elsewhere.

Some private property owners might find it worthwhile to purchase war insurance directly. Those engaged in shipping would need naval insurance. This might be provided by a company specializing in ocean security, providing defenses ranging from marines posted onboard commercial vessels to missiles, submarines, or aircraft for attacking hostile ships. The naval insurer would also monitor the ocean, probably by satellite, and keep watch on suspicious ships that could threaten their policyholders. They would be prepared to deal with pirates as well as state navies.

FREE RIDERS

While millions of people may not purchase war insurance, this would not differ from today’s situation. Currently, millions of Americans make too little money to pay federal taxes. Millions more are net consumers of tax money, whether they are government employees, contractors, officials, or entitlement recipients. None of these contribute to the cost of defense, yet the American military still manages to be the largest in history.

We envision war insurance as one part of a property insurance policy that would protect against natural disasters and crime, including the provision of security and emergency services, as described by Rothbard (linked above). Those who rent their homes might contribute and be protected by way of the landlord’s insurance.

To save costs, some insurance carriers might decide not to subscribe to war insurance, and some customers might prefer not to purchase it. They will have to bear the risk of war alone, but they may see war as unlikely. The level of available defense spending would ultimately be set by the level of war risk, as determined by the market.

INTELLIGENCE

War insurance companies would need to identify, study, and minimize sources of war risk affecting their customers. For this purpose, they would likely form or hire private intelligence agencies for risk assessment.

Today, insurance companies jointly finance research through nonprofit institutions like the Insurance Research Council and share information through CLUE reports, produced by a private company. This allows them to have the full benefit of data while paying only a fraction of the research cost.

War insurance companies might create joint intelligence centers to study war risk. There would be no incentive to distort intelligence to fit a political agenda or protect a state’s image, since these intelligence agencies would serve the interests of millions of customers, rather than a few politicians. The insurance companies would focus on preventing loss, not starting wars.

The intelligence center would likely rate a nation’s war risk according to its military strength, history, and the current ideology and practices of its policymakers, as well as any covertly gathered information. Specialist teams could be formed to study each state or terror group that poses a risk.

A few such intelligence organizations could potentially serve the entire insurance industry, and they would also be motivated to share information with one another, to cut their own research costs. These joint risk assessment centers would do the job that the public currently expects of state intelligence agencies: rationally study and report risk in an unbiased manner, for the sole purpose of protecting life and property.

COMMON DEFENSE

War insurance companies would likely purchase reinsurance from one another in case of outside aggression. Should war break out, the insurance companies would then pool their resources to stop the aggressor. Hoppe (p. 347) notes:

all insurance companies are connected through a network of contractual agreements of mutual assistance and arbitration as well as a system of international reinsurance agencies, representing a combined economic power which dwarfs that of most existing governments.

States claim a monopoly on the use of violence in a territorial area. To expand their power, states invade territory beyond their borders to capture resources and gain control over new territory.

However, if a state invaded a free territory protected by insurance, this might threaten clients of several different companies at once, since insurance companies would not have territorial monopolies. Several companies might be represented within a single neighborhood. These companies would band together to fight the aggressor, along with their reinsurance providers.

Because of the interwoven nature of the insurance business, most of the world’s large war insurance firms would tend to work together in case of any major state aggression. Even those companies whose customers are not injured in the initial aggression will want to stop the invading party before it has a chance to harm the companies’ own customers.

Hoppe also explains that insurance companies would generally oppose any aggression anywhere because “they operate on a nationwide and even an international scale, and they own large property holdings dispersed over wide territories and beyond single state boundaries.” (p.346) They have tremendous diversified investments to protect, providing further incentive to keep the peace and end wars quickly.

War insurance companies would keep military assets ready in case of aggression, from planes to tanks to professional soldiers. As with common intelligence-sharing, some companies might pay a subscription fee to have forces on call, while sharing the costs of training and support. They might even co-sponsor war colleges to train officers in strategy and tactics.

Because of reinsurance, and the fact that multiple companies can provide defense services to the same territorial area, war insurance companies might train their people for joint defensive action. War games would be developed around the most likely war risks, as determined by the joint risk assessment centers. Training would center on bringing the conflict to a rapid, cost-effective close to avoid losses and claims.

If the likely enemy or enemies have a strong air force, the war insurance companies would focus on anti-aircraft weapons. If not, they would shift resources into other areas as needed. There would be no incentive to persist in manufacturing unnecessary or obsolete weapons. The desire of politicians to provide military-related money and jobs to their campaign donors and congressional districts would not be a factor. Spending programs would not become entrenched for political reasons, but would be eliminated the moment they became unnecessary.

By providing a common international defense against rogue states, the global network of war insurance companies would play a role that the United Nations is alleged to play today. It would constantly monitor war risk and put down state aggression.

DIPLOMACY

War insurance companies would avoid violent conflict with each other by contracting to settle disputes through private arbitration. Since war would damage the bottom line of every company, it would be extremely rare between insurance companies, if it ever happened at all.

A company that violated such an arbitration finding would automatically suffer damage to its credit rating, increasing its cost of doing business. Its own insurance risk rating would suffer, and it would likely lose its war reinsurance protection from other companies. Customers would tend to switch providers upon learning their current insurance company is dishonest or aggressive, or that it has lost its defense allies and is therefore less able to protect customers.

Each company would need expert negotiators to resolve conflicts. Negotiations among insurance companies would be routine and follow contractually specified rules and standards.

The wild card would be negotiations with states, because states would not necessarily share the insurance company motives of reducing risk, minimizing cost and avoiding loss. States actually increase their revenue and power through war (see Higgs, Crisis and Leviathan). States would be the primary source of war risk, requiring a different approach to negotiation.

The risk assessment center analysts focused on the nation in question could provide the negotiators with a deep understanding of the particular state’s interests, motives, policy makers, culture, and constituencies. These specialized researchers and negotiators would play the role of the State Department: addressing threats and minimizing conflict through diplomacy.

NON-AGGRESSION

A war insurance company, however well-armed, would have little incentive to start a war, and every reason to end one. First, it must pay the cost of war out of its own pocket. Second, it would have to indemnify any of its policyholders whose person or property is damaged by the war. Additionally, war could threaten the value of the insurance company’s investments, which might even be targeted by the enemy as a means of economic warfare.

The cost of war would naturally lead to higher premiums, pushing customers away to cheaper providers, if the policyholders do not support the company’s war. This is the ultimate market check that is unavailable in our current system – the ability to refuse to fund any war we oppose.

Gustave de Molinari, the first to propose that individuals purchase defense services through voluntary association rather than live under state monopoly, noted that the private security provider must “establish certain penalties against the offenders of persons and the violators of property, and that the consumers agree to submit to these penalties, in case they themselves commit offenses.”

The reinsurance companies could specify that an insurance company pursuing an aggressive policy would forfeit all war reinsurance. This would prevent the industry from being dragged into an unnecessary conflict by a rogue company. The companies would only pull together in situations of defense, like a confederation.

Any aggressor company would act alone, and would draw the wrath of the entire war insurance industry down on it the moment it aggressed, since they would all have customers and property to protect.

DEFENSIVE WAR

There could be cases of a justified, defensive war, such as when a state aggresses against insured territory. The major potential weakness in an insurance company waging war against a state is the state’s ability to finance its efforts through taxation, debt and inflation.

War insurance contracts might provide for the possibility of supplementary premiums in times of defensive war, which would be similar to a temporary tax hike to raise revenue. However, this would likely be avoided if possible, since customers might resent the use of it, as people resent tax increases today.

The company would also have emergency insurance as well as credit facilities prepared in advance. Those who are being defended, as well as people around the world, could be asked to buy stocks or bonds of the war insurance company to help support the war effort, similar to the war bond campaigns of World War II. Additionally, charities might contribute to those fighting the war, as today they give CARE packages and other relief to soldiers in wartime.

The war insurance company could mirror the state in the areas of taxation and borrowing. The private company could not raise revenue by printing currency, however, unlike states with central banks. The question remains whether the international network of insurance providers, with all their resources, could withstand a prolonged war against an inflationary government.

An insurance company would, however, have the option of selling some of its investment assets to raise money if needed – paying for war out of savings. Few states have any savings, and they prefer not to sell off their assets, since this represents a loss of power and prestige.

There is another way in which insurance companies could use their investments when confronting war. If the Ruritanian Army invades an area protected by Walldavia Insurance (a charter member of the International Defense Network), Walldavia, Inc. and its allies might wage economic war by selling off their investments in Ruritania, as well as any Ruritanian government bonds they may be holding. This approach allows them to turn their savings into cash for war funding, while financially damaging the enemy at the same time.

The insurance companies might discourage war by buying the debt of governments they see as war risks. They would have plenty of opportunity, since bellicose governments with large militaries would tend to incur more debt than peaceful ones. Owning the state’s debt would give the insurance companies more leverage over the state’s policy. If the state aggresses anyway, the insurance companies would then punish the rogue state by dumping the bonds – and, as mentioned, use the proceeds to strike back against the state.

Bribing politicians could also be an effective method to encourage peace. Also, Walldavia Insurance could spend millions of dollars on an advertising campaign promoting peace among the Ruritanian public, who might pressure their aggressive politicians toward peace – making it that much easier, incidentally, to bribe the Ruritanian politicians toward that policy.

SELF-DEFENSE

In the essay linked above, Hoppe also indicates that security insurance providers would encourage gun ownership and self-defense measures, because these would decrease the cost of claims to the insurance company. Today, one might receive a discount on homeowner’s insurance by installing a burglar alarm and security monitoring system.

War insurance companies would encourage all forms of self-defense, from security systems to gun ownership. Security insurance companies would probably encourage, and even help organize, “neighborhood watch” groups to reduce crime. In case of foreign invasion, these neighborhood watch groups could serve as guerilla units against the invaders. Membership in such voluntary groups might come to be seen as a matter of civic or patriotic responsibility, as well as a way to save on insurance.

PROPAGANDA

Since insurance companies would only fight defensive wars against aggressors, they would tend to have public opinion on their side in every conflict, which is a great advantage in war.

A war insurance company would naturally have a media division to advertise itself to consumers. A company would need to portray itself as strong and reliable, “Like A Rock.”

States use media and propaganda to advertise their side of the story, and build support for their policies at home, abroad, and often among the population controlled by the enemy state.

War insurance companies might also spend millions or more on propaganda efforts, including the purchase of media companies through their investing arms. Their interest would be in portraying themselves as strong protectors to potential customers, but also in spreading support for peace, not war. This could be part of a strategic effort to reduce war risk worldwide, whether pursued independently or coordinated with other war insurance providers.

They might even offer programs teaching children about the many benefits of peace. It would be in the interest of war insurance providers to sponsor any educational, cultural, religious or entertainment programs that promote peace and teach about the evils of war. This could have a strong impact on popular and academic culture across the world.

ARMS CONTROL

So long as war insurance companies face the threat of states armed with weapons of mass destruction, they will need to be able to respond appropriately. This may include keeping stores of vaccine to protect insureds against bioweapons, or even maintaining nuclear weapons for deterrence.

However, every insurance company would view every nuclear bomb and bioweapon, whether owned by itself, a state, or another company, as a source of extreme risk, potentially leading to unthinkable loss of life and property. Every such weapon eliminated reduces risk for the entire insurance community. Should war insurance companies grow to replace states entirely, total nuclear disarmament would likely follow.

THE COST

It is naturally impossible to calculate what our property insurance rates would be if the cost of military defense were carried by insurance providers. We could start with the price we currently pay in taxes and inflation for our current defense providers. In the United States, the cost of our current military establishment, wars, veterans’ care, and interest on war debt is easily more than a trillion dollars per year.

Subtract out any unnecessary wars and interventions. Subtract out any wasteful spending in the current budget. Subtract out any spending that does not directly serve to protect the life and property of American taxpayers. What remains might be a rough estimate of what it would cost the insurance industry to provide the exact level of defense we now enjoy. It could be even cheaper because of price competition in a free market.

However, should the whole world adopt this system, the defense budgets of the rest of the world would also, in a sense, be available, since insurance providers would work together to prevent loss, reduce risk, and seek peace. As they successfully eliminate threats and promote peace over time, their costs of supplying services would fall, and their premiums would follow. In the long term, war insurance could be quite cheap – and we wouldn’t be paying taxes, either.

FROM HERE TO THERE

In a stateless, insured world, the defense industry would continue to exist, but it would no longer be subsidized by the state. Instead, companies would sell their services in a competitive marketplace.

Defense spending would fall or rise to a level appropriate to existing risk, as determined by the market, with the help of specialized researchers and actuaries. The military-industrial-congressional complex as we know it would vanish. The media would provide a pro-peace bias. There would be no pro-war propaganda, because no one would benefit from war. (Actually, third-party suppliers of defense services, such as mercenary armies or air forces, might benefit. But their paying customers – the insurance companies – would always seek to minimize conflict and cost.)

The basic elements for an insured, stateless society are already in place. The multibillion-dollar private security industry is rapidly growing, as is the private arbitration profession. The world’s insurance industry is already vast, and their resources would swell as they began receiving the money that once funded police, intelligence and military agencies. Many companies already sell war and terrorism insurance.

If you have a policy with Bellwood Prestbury, and are kidnapped and ransomed, the insurance carrier covers the “cost of experts negotiating with kidnappers and reimburses the ransom.” Perhaps they will send in Risks Incorporated, who offer such services as hostage negotiation, extraction, and repatriation.

Evolution from a “state” to an “insurance” system depends primarily on public opinion, or market demand. Molinari speculated that one day, people might “agitate for the freedom of government, as they have already…on behalf of the freedom of commerce.” Rather than supporting one party or another’s desire to control the state, people might eventually reject the idea that any group should hold a monopoly on defense services.

Once, it was believed that freedom of religion would tear society apart, because different faiths could not possibly exist peacefully in the same territory. Instead, freedom of religion put an end to centuries of religious warfare. It seems possible that freedom of government, the liberty to choose our own protectors – or to choose none – could put an end to war altogether.

November 25, 2008