IT would seem difficult, in a nation as famously risk-averse as ours, to go bust in the life-insurance business. And it is: Only three have managed the feat in our history. To fail at selling life insurance to Canadians requires a special talent for bumbling, of a kind rarely found outside the major banks.

The collapse of Confederation Life, the largest insurer to fail yet, excited much press commentary in the something-must-be-done vein. After long minutes of rumination, the wisest heads agreed the answer was much, much more regulation. "Tougher regulations on how insurance companies can invest their funds must be immediately implemented," Peter C. Newman declared, writing for the majority.

The industry, for its part, has placed its free-market principles in a blind trust. Insurers had previously resisted a more intrusive role for government, preferring the industry's own consumer protection plan, the Canadian Life and Health Insurance Compensation Corp. That was until they actually had to pay anyone from the plan. But now, durned if that government money doesn't look pretty good after all.

Even before the Confederation debacle, the industry was looking to the federal government for a $1.5-billion bailout of the plan. Since then sentiment has swung in favour of Ottawa taking over CompCorp altogether. The justification, as always, is the need to maintain a "level playing field," this time with the banks and trust companies, who are backstopped by the federal government through the Canada Deposit Insurance Corp. (CDIC).

Excuse me, but what exactly is the problem here? By any reasonable standard, CompCorp is working exactly as it should. Insurance policies up to $200,000 are guaranteed, as are RRSPs and other deposits up to $60,000. Anything in excess of those amounts will depend on the terms of liquidation, but it appears that Confed's policy-holders will get almost all of the money to which they are entitled. So far as they lose anything, perhaps 10 per cent, it will be a useful reminder to be more careful where they put their money next time.

That may sound callous, but it's a basic element of insurance: It's called a deductible. Any insurance plan has the potential to encourage the very thing it insures against, a perverse incentive well known to certain restaurateurs. If there is not some penalty for filing a claim, if the greasy-spoon that goes up in flames every two years pays no more than the shop next door with the expensive smoke alarms and sprinklers, then the system is not one that pools resources to meet the random accidents of fate, but rather one that transfers income from the safe and steady to the reckless and feckless.

Since politicians live in a world in which all costs have been abolished, that is exactly how every socialized insurance system has been designed. It is the case with unemployment insurance. It is the case with workers compensation. And it is most emphatically the case with deposit insurance. Between 1923 and 1967, the year the CDIC came into being, not a single Canadian financial institution closed its doors. Since then, more than 30 have. This is not a coincidence.

Because the CDIC charged the same premiums to all banks and trust companies, regardless of risk, and because depositors were covered for every dollar up to $60,000, there was little incentive for prudence. For many institutions, the temptation proved irresistible: riskier loans, paying higher returns, could be financed simply by offering higher rates on deposits than the competition. For depositors, there was no need to weigh returns against risk; it was heads we win, tails the CDIC loses. Which is just what it did.

As a result of all this subsidized risk-taking, the CDIC is now into the federal government for more than $3-billion, even after the massive premium increases of recent years. Insuring insurers through the CDIC, or something like it (IncompCorp?), would only make the same mess of the insurance industry.

Indeed, the CDIC is arguably at least partly to blame for the death of Confederation Life. It was, after all, the headlong plunge into commercial real estate on the part of its trust subsidiary - apparently, most of its portfolio was lent to one developer - that brought Confed down. Where did Confederation Trust get its mad money? Depositors. Why weren't depositors more vigilant? Guess. All the regulators in the world can't keep pace with this kind of institutionalized foolhardiness.

The way to level the playing field is to stop subsidizing the banks and trust companies, not to spread the subsidy to insurers. If CompCorp needs more money, it knows where to find it: from the industry whose reputation it protects.