So here we see the government coming into the picture in a much more vivid,

involved, you might say a more creative way than in contracts.

In contracts, essentially the government is present only as the enforcer.
Of the arrangement that individuals have made.
Once again, a contract is a promise which the law will enforce.
But since we are talking about the government,
it's time to get into a new dimension because we have all experienced it.
You have noticed that a lot of contracts you sign are not exactly negotiated.
Very often the government gets into the act, not just by setting up the entity,
Black Box, with which you are contracting but also by setting
the terms of the contracts themselves by limiting or regulating them.
Every time you buy a car, every time you buy something at the store because most
shops are set up as corporations in order to limit their owner's liability.
You are contracting with a corporation under a regulated contract.
Let me give you an example of this kind of regulated contract.
One which you all are familiar with and
you all probably make and are involved in all the time, insurance Contracts.
Now what is an insurance contract,
an insurance contract is when you pay somebody,
that's called a premium, to accept a risk that you don't want to accept.
Because for instance,
if it happened, it would wipe you out, it would be a disaster.
Health insurance is an example of that and automobile insurance is another.
In countries like the United States,
the government does not provide health care for everybody,
as a government service, the way it provides police and fire protection.
Instead, health care is something you get from private providers,
corporations, and you pay for it.
In these societies, a relatively young and
healthy person who is earning money will say well "that's fine,
I've got enough savings and I am earning enough that if I break my leg
I can afford to pay for it but I probably won't break my leg".
"And if I get the flu and I need to see a doctor, that's fine, I can pay for that".
"And I'm only going to get the flu once a year anyway" or something like that.
But what if I get some terrible disease, which is going to be enormously expensive.
In which I haven't saved for, and which I couldn't possibly afford if I had
to pay for it, that's where insurance comes in.
For insurance, I pay a premium every year, put aside a little bit of money,
give it to the insurance company, and that way I transfer
the risk of this relatively rare event to the insurance company.
If this disaster hits me, they will pay but
I have paid them to take that risk, it is a contract.
I have contracted with them to assume the risk of some kind
of healthcare catastrophe, and similarly with car insurance.
After all I don't want to ensure against
having to change the oil every 3,000 miles when I buy the car.
If I can afford a car, I should be able to afford changing the oil every 3,000
miles.
That's not a risk, that's a certainty, similarly all kind of dings and
dents that you get which cause a couple of hundred dollars to fix because people
are careless in packing rots, that comes close enough to being a certainty.
Then it is part of the cost of owning a car and
I can't expect anyone else to assume the cost of owning the car for me.
It's what I do when I buy a car.
However, if the car is stolen lost completely, or
if I get into an accident and injure someone seriously, that could wipe me out.
If I'm a reasonably careful person that's probably not going to happen,
it's not very likely, but if it does it's a disaster.
I buy insurance and
by paying the premium each year I sell the insurance company that risk.
Well, that's the business of insurance, it is the business of getting someone
else to assume a risk for you, paying them to do that.
Now, you wonder why insurance companies can afford the risk of my getting
a terrible disease or having my car stolen if I can't.
Well you say, insurance companies are very rich, well actually they're not very
rich.
They are only rich in the sense that they take in premiums from thousands of
people like me, and they assume those risks for thousands of people.
For the insurance company these catastrophic events are sure to happen
among some of the people they insure.
But they have enough customers that the relatively small premiums
that each of them pay for an event which is quite unlikely for
each of them add up to enough so
that the insurance company can pay off the very few people
to whom the catastrophe occurs and the company can still make some money.
So that's the business of insurance, whether it's car insurance or
health insurance or some other kind of insurance.
And so far, I haven't brought the government into it at all.
Well I have a little bit because insurance companies are almost invariably
companies,
and as companies, they are corporations like Black Box.
And as we saw, it's not just a matter of contracting, but you are contracting
with an entity that has the sanction, the invention, the blessing of the
government.
As I told you in its early life, insurance was actually a matter of partnership.
And people would insure with Lloyd's of London,
for instance, which was a partnership.
The partners started out just meeting in a particular coffee house,
Lloyd's Coffeehouse.
And as a partnership, that worked.
That worked because the partners all shared in the premiums and
they all shared in the risks.
And there were quite a few of them.
But the premiums were set high enough so that when the catastrophes,
which inevitably happen to some of the insureds came along,
the partners would still make a profit.
In fact, there have been times in the history of Lloyd's,
of insurance partnerships, where there were some very general catastrophe,
a series of extremely bad storms or earthquakes and so on.
Where the catastrophe didn't happen to just a few random people but
to a lot of people all at once.
And in those situations the partners, instead of making money, lost money.
And sometimes the whole partnership might have been wiped out.
So what do investors in black box insurance company do?
Well, they set up a corporation which is the one that assumes the risks for
all the people who ensure with Black Box and collects the premiums.
The investors invest in Black Box the way they might invest in any company.
And if Black Box gets it right, sets the premiums high enough, and is lucky enough
that there is no generalized disaster, then the investors will make money.
But if Black Box sets its premiums too low, or
Black Box insured something which turns out to be a generalized disaster and
many, many of its insureds suffer catastrophic loss,
then the insurance company might just go under, disappear.
Might be wiped out.
The investors would lose their investment, but
they wouldn't lose any more then their investment.
The partners in Lloyd's, as I mentioned to you originally were
liable to lose everything right down to their last shirt button.
[Credits- Illustrations by Benjamin Maurer Visual Art LLC]