Well, as the guy staying there, I'd like to have SOME guarantee that the place isn't unsafe, unsanitary, cheating me or spying on me. So as a consumer, then yes I do want them to jump through all the hoops.
It's called foresight. The problems aren't merely "hypothetical"; they're inevitibilities.
I see that you care about this but I don't understand why, since it is clear that you are neither host nor guest in this scenario, and the people who are hosts and guests are not, by and large, particularly worried about the problems you are hyping up.
Insurance isn't responsible in the first instance. Insurance becomes responsible if either (1) the person who is responsible has an insurance contract that provides insurance for that liability, or (2) the person injured by the damage has insurance for the loss independent of liability (obviously, this insurer will then go after the person responsible for the harms to recover its costs, if possible.)
It really is that simple. Don't deprive other people of choice because you don't want to choose.
The whole hotel-thing is 100's of years of working that out in law. Now we start over? Just because AirBnB is cool, and we want it to succeed? I don't think this is going to end well.
That doesn't address safety and taxation issues.
The 'free market' doesn't address safety well; that's why we have regulations. For example, it's not sufficient to say, 'if you are concerned about the safety of this restaurant's food, don't eat there'. No consumer has enough information to make that judgment reliably, and many consumers have additional challenges (consider the elderly, travelers from other countries who lack English or culture literacy, etc.). Also, the remedy (the Airbnb host gets bad reviews) is too late if someone is injured or loses their property; the system has failed at that point.
We also have bonding, insurance and civil liability, which serve the same purpose in a more flexible way.
Those solutions are useful, but only sometimes work and when they do they only provide money after the fact. In many cases, such as injury, death, or crippling fraud (e.g., an elderly retiree loses their home and savings), that's not sufficient.
Hosts that don't treat neighbors respectfully or guests safely will quickly see bonds confiscated and premiums raised until they are out of the business.
Likewise, insurers often provide discounts for good behavior like taking safety courses, a history without incidents, installing anti theft devices, etc.
And requiring insurance also gives neighbors a recourse (payouts from the policy) if the block is set on for or something (though there are already laws and regulations about that sort of thing).
No, legal liability rules give the neighbors recourse. What insurance and/accountability bond requirements do is reduce the risk that insolvency will prevent a liability judgment from being satisfied (though one which exceeds the required coverage may still not be fully satisfied if the liable party is insolvent.)
No solution is perfect. Planes still crash; should we do away with the FAA?