The insurance that made people careless

A scheme that reimbursed the full cost of replacing stolen bicycles saw theft claims rise by a third in its first year. Thefts in the city had not risen.

Two separate things were happening and the distinction is central to how insurance is designed. Some of the increase was reporting: people who previously absorbed a loss now had a reason to file a claim, and the underlying rate was unchanged. Some of it was behaviour: with the full cost covered, the marginal benefit of a good lock fell, and so did the rate at which good locks were bought. Economists call the second moral hazard, and the name is unhelpful, because nothing immoral is involved. A person responding to a changed incentive is behaving ordinarily.

The standard remedies target the behaviour without punishing the reporting. An excess — the first part of any claim paid by the owner — restores some of the benefit of a lock while leaving the catastrophic loss covered. A requirement to show a lock of a specified standard makes the precaution a condition rather than a choice. Lower premiums for registered frames use a precaution that also helps recovery.

What the scheme's designers had got wrong was simpler than any of this. They had no baseline. Because no one had measured claims or lock purchases before the scheme, the rise of a third could not be split into its two parts, and the policy argument that followed was conducted entirely on assumption.

The lesson is procedural rather than economic. Any change in incentives will produce a change in both behaviour and reporting, and only a measurement taken before the change can tell you which one you are looking at.