What are the outcomes for using insurance, and what are the outcomes for using regulation? Does anyone know the answers in a technical policy sense (not in a philosophical sense)? They are different tools useful for different problems.
Thinking out loud, insurance seems like a poor solution when people will suffer serious, irreparable harm. If the lawnmower severs a foot, then an insurance payout isn't really sufficient; regulations should prevent that from happening in the first place. More broadly, my point is that there are larger issues than economics.
> Presumably, the manufacturer will pass on the costs of those insurance premiums to the consumers.
In economics, that is not the case. Businesses don't price goods at 'cost-plus'; they don't look at their costs and add a profit margin. Think of the soda at the movie theater on one hand, and on the other the car being sold at a loss because the market is soft; think of software. Like all businesses, the lawnmower manufacturer already is pricing their product at the level that maximizes total sales revenue, which depends on supply and demand; raising the price will reduce revenue (probably because unit volume will decrease too much to be compensated for by per-unit revenue increase). If they could raise the price and bring in more revenue, they would have done that already.
There is an issue of elasticity: If your customers' alternatives are limited - i.e., if they can't go without your product, if there are limited competitors and substitutes - then you can raise prices more easily. A Van Gogh painting is highly inelastic; lawnmowers are much less so.
What isn't being mentioned here is that insurers will require insured companies to do a bunch of stuff in order to remain insured. Have some processes in place, do some things, and so on.
Just like your car insuruance isn't valid if you drink and drive, your software company insurance might not be valid if you aren't using source control and have no testing or code review proccess.
So in some ways, what you get out of insurance is market driven 'regulation'.
Possibly, because a rival insurance company can impose different conditions, insurers are incentivised to require only the stuff that really reduces risk, while regulators might make irrational regulations driven by moral panics in the press. Similarly, they might be more responsive to supporting new technqiues that reduce risk at lower costs, because customers will seek out an insurer that lets them use those.
Possibly, insurers are less suceptible to moral hazard, where regulator employees have close relationships with industry heavyweights and make policy that helps their buisness, at the expense of consumers and sector rivals. Insurers mostly want to make money.
Regulators might be better sometimes because their staff tend to be very mission driven (they want to fix the problem, not make money). They will get a kicking from the public if there is a big accident and laws and regulations did not prevent it, while an insurer is only punished if they don't satisfy current law. So a regulator might be more proactive.
I'd only add that the insurer's incentive to reduce risks to their profits is not always aligned with consumer's risks. As a simple example, the insurer may require the vendor to have consumers sign away their legal rights to reduce the risk of expensive lawsuits.
Bad question, false dichotomy: these are not apples-to-apples comparisons. How about some minimal regulations that include an insurance requirement?
So I agree: yes, the existence of tort law sometimes obviates the need for regulation; but has hardly banished regulation or the need for it entire!
Eh, more or less. Increases in the price of supplies sometimes do lead to an increase in the end price of consumer goods. I agree that this is more likely to happen for inelastic goods, though.
This is the problem.
And "solutions" like that can easily backfire, because they squeeze medium sized companies out of the market, who might stake out a middle ground between $20,000 Cisco hardware and $150 "disposable cameras" from Fly By Night Corp, by charging $200 for a product that actually guarantees patches for a specific number of years.
Because the liability risk raises the price the middle-ground company has to charge to the point that they can't compete with Fly By Night Corp who doesn't care. Which means more sales of insecure garbage products, because the customer no longer has the option to buy an affordable product that receives patches, and that customer can't afford the $20,000 industrial grade product, so more people end up with the insecure garbage.
It would be much more effective to just require manufacturers to provide security patches for e.g. 7 years. Fly By Night Corp still wouldn't do it, but then at least Samsung would.
Freedom Markets™ are best served by binding arbitration.
My comment about this got 0 attention though...
If we regulate insurance so that a product needs to be backed by a 10-year liability insurance, it might have 2 good outcomes to fix this:
1) the insurance company might ask a lot of hard questions and require audits, plans, etc 2) the insurance company might require escrow to the iot device's update mechanism in case of bankruptcy, so they can remote-brick the devices
It's unlikely that the reality would be so rosy though - mainly the claims against the insurance would likely be too small in many cases. It might help in 10 years against the biggest ddos botnets. Not nearly as good as direct regulation.
It sounds great if I'm MegaCorp with an entire department for dealing with this stuff, but as an independent developer trying to start something it's a horrible idea.
That's what insurance is for. Something like this was discussed in my torts class in law school, except that was long before IoT devices existed so it was about things like lawn mowers.
The idea is that it might make the most sense economically to make the lawn mower manufacturer liable when users cut off a finger or toe, even if it was due to consumer stupidity instead of any negligence on the part of the manufacturer, because the manufacturer is in the best position to estimate the risks and purchase insurance to cover them.
Presumably, the manufacturer will pass on the costs of those insurance premiums to the consumers. The manufacturer still has an incentive to try to build safe mowers, because if their insurance company ends up paying out a lot the premiums will go up. They can pass those higher premiums on to the consumers, of course, but that will make them more expensive than their safer competitors.
The manufacturer is in a good position to deal with insuring for these injuries because they know how many mowers they are selling. Other candidates have less useful information. For example, a consumer usually has no idea what their chances are of suffering a lawn mower accident, so have no idea how to decide how much insurances is needed. Health insurance companies will have a good idea in the aggregate of how many of these accidents occur in a year, but they have no idea which of their customers use lawn mowers.
Done right, this should not hurt a market much.
I'm not sure it could work for IoT, though, because a lot of IoT devices are made by new companies that probably will not be around long. With things like lawn mowers, you could takes years to get around to cutting your hand off, and still reasonably expect the manufacturer to be around. Not so with a lot of IoT devices.