[Quick Overview - This book introduces a new economic system that aims to eliminate all of the poverty, inequality, hunger, slums and so on found on Earth today. This new system is introduced as a thought experiment within the context of the million-person Mars colony recently announced by Elon Musk. This new system will radically improve the quality of life for the vast majority of humans living on planet Earth today.]
[Feedback and suggestions on any part of this book are greatly appreciated. Contact information is here.]
How would insurance work on Mars? Yes, insurance...
Let's try another example. How would insurance work in this new Mars economy?
Insurance? Yes, insurance. Insurance is a purely financial product designed to reduce risk, and it is incredibly common in the developed world. Every middle class American pays for at least one form of insurance, and often is paying for three or four different kinds simultaneously (e.g. house insurance, health insurance, life insurance and car insurance). In some cases, it is possible to see the monthly bill for all forms of insurance exceeding the rent payment for a family of four in the United States (especially if there is a teenager in the family driving) – insurance is a huge deal, and a huge expense, for people living in developed nations on Earth today.
Here is a nice definition of insurance to help understand what we are talking about:
"Risk-transfer mechanism that ensures full or partial financial compensation for the loss or damage caused by event(s) beyond the control of the insured party. Under an insurance contract, a party (the insurer) indemnifies the other party (the insured) against a specified amount of loss, occurring from specified eventualities within a specified period, provided a fee called premium is paid. In 'general insurance', compensation is normally proportionate to the loss incurred, whereas in 'life insurance' usually a fixed sum is paid. Some types of insurance (such as product liability insurance) are an essential component of risk management, and are mandatory in several countries. [ref]
That's a mouthful, but it gets very easy to understand if we look at an example.
Imagine that you have a house. You are afraid that if the house burns down, you will have a big problem, as in no place to live. On Earth you are usually also concerned because you have a giant mortgage attached to the house, and therefore a huge problem with the mortgage company if the house burns down.
So you buy fire insurance for the house. If the house burns down, the insurance company agrees to pay to rebuild the house. With fire insurance, you as the customer pay a monthly or yearly premium to the insurance company. Let's say it is $600 a year, or $50 per month, for fire insurance on the house.
Why is fire insurance so cheap? You are only paying $600 a year, but a house costs $300,000 say. Even if you paid the premium for 100 years, you have only paid $60,000 (ignoring inflation). The reason why this works out is because house fires are incredible rare, relatively speaking, in a developed country like the United States. Here are a few statistics:
According to the National Fire Protection Association, there are an average of 358,000 home structure fires in the U.S. every year [ref]. Or this page says, "Average number of residential home fires each year: 374,000" [ref].
Not every house burns to the ground. The cost of all of these house fires is $7.32 billion [ref]. That works out to $19,600 in damage per fire.
How many houses are there? There are 75.6 million owner-occupied housing units in the U.S. in 2016 [ref], out of a total of 135 million housing units.
If we use the 75.6 million number and divide by 374,000, it means that only one out of every 202 houses experiences a house fire every year. That's half a percent of the houses every year have a fire.
So how would fire insurance work on Mars? Let's say that you invested 1,000 hours of human time into your house. You get together with 1,000 other homeowners with similar-size housing, and the 1,000 of you all agree to the following: "If any one of us experiences a house fire, we all as a group agree to contribute the 1,000 hours needed to rebuild the house." In other words, everyone agrees to contribute one hour each to the system, and a house that burns down will be repaired or rebuilt.
This sounds great. If my house burns to the ground, I know that the 999 other people have my back and will help me rebuild my house very quickly by donating their time to the system.
So what would happen? Looking at the statistics above, we know that every year we would see, on average, 5 out of the 1,000 houses experiencing a house fire. So, every year, the 1,000 people in this group would each need to contribute 5 hours to cover for the 5 houses that burn.
Yes, you are reading that right: 5 hours per year is what you would "pay" for fire insurance in this kind of insurance system.
But wait, we forgot something. Remember that the average house fire in America only costs about $20,000. In other words, very few houses burn to the ground. In fact, the average house fire only costs a tenth of the average house price in America.
So on Mars, the real "price" of insurance would only be one tenth of the "cost", or 0.5 hours, or 30 minutes of time, per year. Every year you would do an extra 30 minutes of work to help the people whose houses experience a house fire.
Since everyone on Mars will necessarily have housing, and since everyone therefore needs fire insurance, the normal task allocation system would simply handle "fire insurance" and make it an automatic part of the Mars colony economy.
In the Mars economy, we don't need all the crazy insurance companies, with all of their crazy $20 million/year CEOs and executives, and their skyscrapers in New York City, and their multi-billion dollar ad budgets, and their gigantic dividends, and their private jets and all of the other nonsense (see Chapter 3 for a discussion). All of that falls away in the Mars colony. On Mars, it comes down to a "fire insurance bill" of 30 minutes per year (assuming your dwelling contains 1,000 hours of human time – if your house contains more human time, the rate is proportional). This "bill" is invisible, because it is all handled automatically by the system. When a person's dwelling has a fire, which is incredibly rare statistically speaking, the colony's economy rebuilds or repairs it.
"Well what happens if a tragic meteor strike takes out 10,000 homes on Mars all in one stroke?" Let's keep in mind that, on Earth, insurance companies would all punt on that. They would classify the meteor strike as "an act of god" and refuse to pay anything. The insurance companies would punt to the government to cover a catastrophe like that. Which is exactly what would happen on Mars. The only difference is that on Mars, the system handles everything, including the catastrophes. And the system on Mars handles it incredibly "inexpensively" when compared to the wasteful, wealth-concentrating, corporate nonsense happening on Earth today.
What about life insurance? First let's understand that not that many people in the United States have life insurance – only about half:
"85 percent of consumers agree that most people need life insurance, yet just 62 percent say they have it. 44 percent of U.S. households had individual life insurance as of 2010 — a 50-year low. In 1960, 72 percent of Americans owned individual life insurance. In 1992, 55 percent owned it." [ref]
Why do only half of the people have life insurance? Kids don't get life insurance, and neither do old people, and neither do single people. The only people who really need life insurance, by and large, are families.
So why do families buy life insurance in the United States? Because if mom and dad both work, and there are two kids, and mom or dad dies, there is a huge problem for the spouse who is still alive. The remaining spouse is going to have a problem making ends meet on Earth. The mortgage payment still comes due every month, and the electric bill, and the grocery bill, etc., but with one spouse dead there is only half the money to pay all of these bills. Life insurance helps solve this problem.
So some families buy life insurance on both spouses to try to cover the gap if one spouse dies. Many families just wing it because they can't afford life insurance – their hope is that neither spouse will die while the kids are young. And this often works out. The average life expectancy in the United States is 79.3 years [ref], after all.
So how does life insurance work on Earth? You might decide to get $500,000 of 20-year term life insurance for both spouses. If they are both 30-year-old healthy non-smokers, the total bill for both might be $800 to $1,000 per year [ref] (life insurance rates have lots of variables, including state of residence, exact level of healthiness, gender, driving record, etc.). Once a life insurance policy is purchased, if one of the two spouses dies within the 20-year term, the family receives a lump sum payment of $500,000.
What is the probability of one of the spouses dying? It is pretty low. For example:
"A 20-year-old U.S. woman has a 1 in 2,000 (or 0.05 percent) chance of dying in the next year, for example. By age 40, the risk is three times greater" [ref]
You can also go to a calculator like http://www.longevityillustrator.org. If you are a 30-year-old non-smoker in average health, your chance of living for the next 20 years is about 98%.
So there is a 2% chance of any 30-year-old healthy non-smoker dying in the next 20 years. To provide themselves with life insurance on Mars, 1,000 people might bind together into a group and they agree to the following: "If one of us in the group dies in the next 20 years, the others agree to contribute, as a group, 15,000 hours of time to the remaining spouse in the family."
So what happens? Over the 20 years, approximately 20 people out of the 1,000 would die. This is one person per year. So every person in the group would have to contribute about 15 hours per year to cover the dead people. This is the "payment" for this level of life insurance – roughly 1.25 hours per month over the term of 20 years. This is completely voluntary. If you don't want life insurance that's fine (most people in the United States do not have life insurance), but if you do, this is the "cost" of it.
"What happens if some catastrophe comes along and kills 500 out of the 1,000 people in the pool?" If a catastrophe like this happens, it means that it will apply to the whole Mars colony. Half of the Mars colony population will be wiped out. In a catastrophic case like this, where half of the Mars colony has perished, it is likely that the entire Mars colony will have to completely reconfigure – there will be lots bigger things to worry about than "life insurance". The survivors will be scrambling for survival.
Who in the Mars colony will need life insurance? As on Earth, children do not need it, old people do not need it, and single people do not need it. Families with children are the ones who need life insurance. But do they? This really depends on how the Mars colony handles children. We will explore this in Chapter X.
In the United States, people use health insurance to try to avoid catastrophic spikes in medical expenses. But it is widely recognized that the U.S. health insurance system is a failure for its citizens. Every other developed country in the world uses some form of universal health care instead [ref]. These universal systems generally cost about half of what the United States spends, and lead to better outcomes [ref], [ref]. The Mars colony will use a universal health care system provided to all colonists, as discussed in Chapter X.