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>Insurance companies are in a much better place to price this insurance than NASA Is that really a thing? The risks of adverse selection and moral hazards woul

>Insurance companies are in a much better place to price this insurance than NASA Is that really a thing? The risks of adverse selection and moral hazards would seem insurmountable.

bluGill 5y ago
You can get insurance on anything you want. However the more unknowns there are, the more they will charge. You can get fire insurance that will cover even if you burn your house down - but it will cost you (not having insurance and burning your house down might cost $.01 more than buying insurance)
gpm 5y ago
You can negotiate insurance for just about anything (there are sometimes laws against things like taking out life insurance policies against a third party, but none that would apply here). No doubt the insurance company would insist on various forms of audits, similar to what the government insists of for cost plus contracts today. Probably the most successful contractors wouldn't pay an insurance company for this, because it's a stupid model for contracts that wastes resources, but it wastes no more resources than having the government play the role of the insurance company.
- teruakohatu 5y ago
  I think you need to articulate why you think the govt. is forced into this insurer role. They are no different to any large private buyer. Any insurance would be expensive, and would be a cost passed to the government, as any other project related costs are. The insurance provider spreads risks across policies but since all these policies would probably be for government contracts, the costs would all be passed on to government. The government would end up paying for all the policies plus the insurance company profit margin. The only winner here is the insurance company, maybe the contractors. The government will be slightly worse off.
  - gpm 5y ago
    > I think you need to articulate why you think the govt. is forced into this insurer role. They are no different to any large private buyer. An insurance provider is a party taking financial risk if something goes bad for someone else. In the cost plus contracting model, the government is taking the financial risk if the project goes poorly for the contractor, that is the government is providing insurance. > The insurance provider spreads risks across policies but since all these policies would probably be for government contracts, the costs would all be passed on to government. Of course, there is no free money here. However the government can correctly evaluate the costs of the different proposals under a fixed cost contract model, whereas they are not capable of correctly evaluating the cost of the insurance that they add on top in a cost plus model, because they aren't set up to correctly price the insurance they are selling. This means that in the fixed price model, they can get a much better approximation of the cost in the value/cost equation they are trying to maximize when evaluating bids, and it means that contractors are motivated to provide options that maximize the same, instead of being motivated to provide options that maximize the difference between how the government miss-prices the insurance, and the actual value of the insurance. In the end everyone ends up better off, because there is less waste.
  - bluGill 5y ago
    They don't have to, but someone will be the insurance provider and the government will pay for it. The government by playing insurance has better options to cut a project if things are getting to expensive, but this requires some willingness to cut project scope which they might not be willing for (and a contract that allows such a thing).
- NovemberWhiskey 5y ago
  I should probably have been clearer. I understand you can insure all kinds of risks, and that you can ask an underwriter to insure against most anything. My question is more whether this is a well-formed insurance market where coverage is available under economically realistic terms.
  - gpm 5y ago
    I can't say that I'm aware of an active market for insurance similar to this, not that I would necessarily be aware of one. If one doesn't exist, that should just be a sign that the government really shouldn't be providing it either though, because it isn't profitable. The government isn't somehow better placed to insure R&D work (or whatever you want to call the work being discussed) than any other insurance company is.
    - bluGill 5y ago
      The government is better able to set a fixed budget though. R&D as in do X hours of work on FTL is much better than deliver FTL (I intentionally picked something impossible - though in a the world R&D should be about things you think are possible but are not sure of)
      - gpm 5y ago
        What you're describing isn't a cost plus contract, it's a fixed cost contract for a study (assuming cost/hour is fixed). These exist, they're frequently a good idea. Cost plus would be "deliver a FTL ship, we'll pay you X * costs, no it doesn't really matter if you go 10x over what you initially quoted us for the work and still don't have the thing". You can see why contractors under that model are willing to make unrealistic quotes and promises about FTL, or for a real world example why SLS is many years and many billions of dollars behind schedule.

>Insurance companies are in a much better place to price this insurance than NASA Is that really a thing? The risks of adverse selection and moral hazards would seem insurmountable.

bluGill 5y ago

You can get insurance on anything you want. However the more unknowns there are, the more they will charge. You can get fire insurance that will cover even if you burn your house down - but it will cost you (not having insurance and burning your house down might cost $.01 more than buying insurance)

gpm 5y ago

You can negotiate insurance for just about anything (there are sometimes laws against things like taking out life insurance policies against a third party, but none that would apply here). No doubt the insurance company would insist on various forms of audits, similar to what the government insists of for cost plus contracts today. Probably the most successful contractors wouldn't pay an insurance company for this, because it's a stupid model for contracts that wastes resources, but it wastes no more resources than having the government play the role of the insurance company.

teruakohatu 5y ago
I think you need to articulate why you think the govt. is forced into this insurer role. They are no different to any large private buyer. Any insurance would be expensive, and would be a cost passed to the government, as any other project related costs are. The insurance provider spreads risks across policies but since all these policies would probably be for government contracts, the costs would all be passed on to government. The government would end up paying for all the policies plus the insurance company profit margin. The only winner here is the insurance company, maybe the contractors. The government will be slightly worse off.
- gpm 5y ago
  > I think you need to articulate why you think the govt. is forced into this insurer role. They are no different to any large private buyer. An insurance provider is a party taking financial risk if something goes bad for someone else. In the cost plus contracting model, the government is taking the financial risk if the project goes poorly for the contractor, that is the government is providing insurance. > The insurance provider spreads risks across policies but since all these policies would probably be for government contracts, the costs would all be passed on to government. Of course, there is no free money here. However the government can correctly evaluate the costs of the different proposals under a fixed cost contract model, whereas they are not capable of correctly evaluating the cost of the insurance that they add on top in a cost plus model, because they aren't set up to correctly price the insurance they are selling. This means that in the fixed price model, they can get a much better approximation of the cost in the value/cost equation they are trying to maximize when evaluating bids, and it means that contractors are motivated to provide options that maximize the same, instead of being motivated to provide options that maximize the difference between how the government miss-prices the insurance, and the actual value of the insurance. In the end everyone ends up better off, because there is less waste.
- bluGill 5y ago
  They don't have to, but someone will be the insurance provider and the government will pay for it. The government by playing insurance has better options to cut a project if things are getting to expensive, but this requires some willingness to cut project scope which they might not be willing for (and a contract that allows such a thing).
NovemberWhiskey 5y ago
I should probably have been clearer. I understand you can insure all kinds of risks, and that you can ask an underwriter to insure against most anything. My question is more whether this is a well-formed insurance market where coverage is available under economically realistic terms.
- gpm 5y ago
  I can't say that I'm aware of an active market for insurance similar to this, not that I would necessarily be aware of one. If one doesn't exist, that should just be a sign that the government really shouldn't be providing it either though, because it isn't profitable. The government isn't somehow better placed to insure R&D work (or whatever you want to call the work being discussed) than any other insurance company is.
  - bluGill 5y ago
    The government is better able to set a fixed budget though. R&D as in do X hours of work on FTL is much better than deliver FTL (I intentionally picked something impossible - though in a the world R&D should be about things you think are possible but are not sure of)
    - gpm 5y ago
      What you're describing isn't a cost plus contract, it's a fixed cost contract for a study (assuming cost/hour is fixed). These exist, they're frequently a good idea. Cost plus would be "deliver a FTL ship, we'll pay you X * costs, no it doesn't really matter if you go 10x over what you initially quoted us for the work and still don't have the thing". You can see why contractors under that model are willing to make unrealistic quotes and promises about FTL, or for a real world example why SLS is many years and many billions of dollars behind schedule.