Tag Archives: Insurance Companies

How to stop piracy (assuming that Tim Geithner is no longer Treasury Secretary)

If you want to increase a behavior, you reward it.

If you want to decrease a behavior, you punish it in an unexciting way.

“Unexciting” is important here. Exciting situations can be their own reward, and thus actually increase the behavior you think you are punishing.

Currently, insurance companies reward pirates, and punish crews that want to protect themselves from pirates.

Insurance companies reward pirates by paying ransom. When a pirate receives ransom, he and all his friend know a way to get more money: take more ships hostage.

Insurance companires punish crews who try to defend themselves. Premiums go up if ships are armed, and therefore shipping companies that try to protect themselves from pirates face higher premiums. This is exactly the sort of unemotional punishment that reduces the frequency of a behavior.
pirate_party

This should be turned around.

Insurance companies that pay ransom to hostages should be punished in an unemotional way. Insurance companies that pay ransom should be open to litigation by all future victims of pirates. This would also reduce the reward pirates receive for taking ships.

Pirates should not be allowed to keep hostages. Whether they are rescued, killed in attempts to rescue, killed in attempts to arrest the pirates, or killed in attempts to kill the pirates do not really matter. The important thing, from a systematic perspective, is preventing pirates from receiving a reward from piracy.

Unfortunately, the benefits of this policy will be limited as long as Tim Geithner is Treasury Secretary.
paul_bernake_geithner

Under Geithner, the only way a politically powerful company loses money is by not having enough friends in Washington. Likewise, the best way for a politically powerful company to make money is by having friends in Washington. Therefore, Lehman Brothers (which did not have friends, and suffered a bad quarter) went bankrupt, while Citi (which has friends, and suffered a bad quarter) got billions in TARP aid, and Goldman Sachs (which perhaps has more friends than anyone) got a $15 billion, no-strings-attached, no-repayment needed check.

As long as Geithner is Treasury Secretary, insurance companies would be foolish for looking at the actual profit-and-loss actions of their consequences. Far more important, under Geithner’s watch, is doing the politically popular thing.

Tim Geithner is so bad at his job, that he is a national security threat… when it comes to pirates, at least.