Okay, my thinking is basically that the insurance mechanism's predicted effects feed back to the legislature-level, not necessarily the outlaw-level (though it can do that too -- see the end of this comment).

In other words, in anticipation of this insurance-like reallocation, a legislature will find most of its potential laws less appealing. For example, if they want to ban something, they are doing it to reward a politically-powerful group and punish one that is less so. They want, e.g. "lots of wodget-sellers jailed so that honorable wodget-avoiders don't have to deal with the wodget menace". With the insurance mechanism, however, they can't get that by itself; at best, they can get that plus a large transfer of wealth from the "good guys" to the "bad guys" -- which is much less politically appealing.

Even if it doesn't have that influence on the legislature, and they persist in such bans, the general effect of the insurance (transfer of financial resources from those supporting [in this case] the ban to those opposing it) may not mean that the sellers of the banned product "take the money and run". It could just as well mean they can raise better barriers against law enforcement (like what happened with alcohol dealers under prohibition, who could make enough to disrupt the laws against them without them being overturned), allowing them to continue in their work.

So perhaps "impotent" is an exaggeration, but it definitely weakens the power of the legislature through several effects (legislators playing the prediction markets, political unattractiveness of enriching the target of the laws, and the shift in financial power each law brings).