Insurance as a Warning Signal

In 2024, the UK restricted XL Bullies, a breed of dogs known for violent behavior: existing owners could keep them only if they met strict conditions, including third-party liability insurance. That requirement was a test: if insurers were willing to cover the dogs at a reasonable price, that would suggest the risk was manageable; however, if insurers refused to cover them, it would mean that the risk was larger than most assumed.

Shortly after the introduction of the new policy, a major UK dog charity called Dogs Trust stepped in to provide coverage through its “Companion Club” scheme. But the scheme became too expensive, prompting Dogs Trust to withdraw the insurance.

What’s puzzling is the government’s response: instead of asking what this revealed about the underlying risk, the government removed the insurance requirement.

This is stupid. Dropping the insurance requirement does not make the risk disappear; it only moves the cost from owners to potential victims. If an XL Bully attacks someone and the owner lacks insurance, the victim now bears more of the downside. The government has not reduced risk but merely hidden its price.

I describe a similar pattern in my latest book, Poverty and Prosperity. In January 2025, a devastating fire destroyed much of Pacific Palisades in Los Angeles. The fire itself was terrible, but there had been a warning months earlier: insurance companies had already been pulling back from the area.

Why? California’s government limited insurers’ annual rate increases. As fire risks rose, insurers couldn’t adjust prices to match the real danger. Unable to charge sustainable rates, they stopped offering coverage.

That withdrawal should have been interpreted as a warning. A government that respected price signals would have asked: why are insurers fleeing? What do they know? What risk are they seeing that our policies are obscuring? Should we increase fire prevention, change building rules, harden infrastructure, or rethink where people can build?

Instead, too many governments treat rising prices as the problem itself. Insurance becomes expensive, so they suppress premiums. Dogs become hard to insure, so they remove the insurance requirement. Housing becomes unaffordable, so they cap rents. Energy becomes expensive, so they subsidize consumption. Sometimes these interventions are politically necessary, but they become dangerous when they confuse the symptom with the disease.

The right response to unaffordable insurance is not automatically to force people to buy it, nor automatically to remove the requirement. It’s to ask what the unaffordability reveals.

The stupidest thing governments and voters alike can do is to silence the signal and then act surprised when the underlying risk materializes.