Insuring More, Ensuring Less: The Costs and Benefits of Private Regulation Through Insurance
Insuring More, Ensuring Less: The Costs and Benefits of Private Regulation Through Insurance
This chapter investigates the institutional and distributional consequences of insurance as a technology for managing risk (not simply spreading it). Using the language of economic sociology, the chapter conceptualizes insurance gate keeping as a form of institutional embeddedness (links between institutions—here insurance and other institutions) that has replaced individual embeddedness (links between individuals). It contends that this expansion of insurance poses a moral hazard threat, but not for the reasons commonly discussed in the economics literature. Where most moral hazard analyses consider the insured as the threat, the chapter contends that insurers also constitute a moral hazard threat because they seek to minimize what gets classified as a loss in order to maximize financial profits. On the one hand, insurance is a loss-spreading device and works best when the risk pool is large and diverse. On the other hand, insurers can offer better premium rates to policyholders and profits for themselves and their shareholders by decreasing the pool's diversity and excluding those most likely to experience loss.
Keywords: insurance, embeddedness, private regulation, risk pool, premium rates, policyholders
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