Policy Issues in Insurance

1990-0821 (online)
1990-083X (print)
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This series addresses major concerns of economic, political and social actors in the insurance sector, and covers a wide scope of regulatory and supervisory issues, such as: investment regulation, solvency assessment, management of insolvency, insurance contract law, mandatory insurance, reinsurance, taxation of insurance products, accountability, convergence in the financial services industry, policy holder protection.

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Insurance and Expanding Systemic Risks

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28 July 2003
9789264102910 (PDF) ;9789264102897(print)

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This comprehensive study responds to the growing concerns of economic, financial, political and social actors regarding the ever increasing exposure to new expanding risks. These risks are particularly related to natural disaster/environment pollution, technology, health and terrorism. For insurers the difficulty is encountered in adequately appraising and covering the potential liability stemming from these risks. It also sketches out some policy recommendations for decision makers in governments and in the business community on how to limit, prevent and manage such risks. In this perspective it will constitute a unique reference work for the attention of both OECD countries and emerging economies.

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  • Introduction

    It is well known that many new risks are emerging as a result of various causes. Technological progress may have led to substantial benefits and gains for society but an unavoidable side-effect has been that substantial health risks have arisen and that serious environmental pollution is threatening the global commons. By the latter, we refer to global warming and the depletion of the ozone layer. Some argue that there is a direct causal link between human activities and climate change...

  • Expanding Liability for Systemic Risks?

    Although the main focus of this study is on the implications of newly emerging systemic risks for the insurability of those risks, the importance of developments in the legal system will also be underlined Indeed, one consequence of increasing systemic risks will be the fact that more accidents may obviously happen – accidents, moreover, with a higher damage potential. One (important) way that the consequences of these accidents can affect insurers is through the use of liability law. Indeed, the first question that will often arise when a group of persons is victimised as a result of a systemic risk, is whether a third party can be made liable for the consequences of an accident. The legal tool to force the third party to pay compensation to the victim is obviously liability law, also referred to (in some legal systems) as tort law. As a result of newly emerging risks, in many countries there has been a legal trend towards expanding liability. Indeed, in many legal systems legislators and judges have become increasingly sympathetic to the interests of victims and have therefore tried to accommodate them as much as possible so that they could get compensation for their losses via liability law. The tools to achieve this goal were given either by the legislator or by judges, in the latter case, by means of broad victim-friendly-interpretations in case law. Although this trend towards an expansion of liability law may to a large extent have accommodated the interests of victims, the other side of the medal is obviously that it has led to an increasing pressure on enterprises and therefore also on their insurers. It is particularly against the increasing use of liability law that insurers have been looking for remedies. In some legal systems, such as that in the US, scholars like Priest have argued that it has been the expansion of liability law, which has led to an insurance crisis.17 We will therefore focus on these developments in liability law to see whether they have had a negative impact on the insurability of risks. In the next section (Ch. 3) we will then address the insurability of systemic risks more broadly, and then come back to the developments in liability, considering in what way they negatively affect insurability (Ch. 4)...

  • Insurability of Systemic Risks

    In this part of the study, we will try to focus on the key question, namely, whether emerging systemic risks are insurable. We will therefore address the theoretical conditions that have to be fulfilled to guarantee the insurability of a risk. It is therefore necessary briefly to show how insurance works. First, we will mainly focus on the functioning of liability insurance, although some generalities apply to other forms of insurance as well. Next, we will address other insurance techniques such as first-party and direct insurance...

  • Remedies for Dealing with Expanding Liability for Systemic Risks

    In the previous section, we discussed a variety of instruments that are available for insurers for dealing with increasing systemic risks. An upper limit on coverage may be an appropriate remedy for uncertainty concerning the magnitude of the damage; charging an appropriate risk premium can be used to deal with insurer ambiguity. Lastly, risk differentiation is the general means of coping with expanding systemic risks...

  • Alternative Compensation Mechanisms and New Financing Techniques

    In this study, we have so far mainly discussed the applicability of traditional insurance schemes as an instrument to compensate damage caused by systemic risks. Moreover, we focused principally on liability insurance. In this section, we will show that the general principles of insurance, which were discussed above, are also relevant even when traditional insurance undertakings are unable to provide cover in the form of liability insurance, and other compensation mechanisms will be outlined. For instance, the general idea that, no matter what type of compensation system is put in place, it should always be organised in such a manner that the party creating the risk should also bear the financial consequences of it insofar as possible, is a principle which is not only crucial for liability insurance. This idea of risk differentiation and the fact that a liability system should provide adequate incentives for prevention remains valid no matter what type of compensation mechanism one seeks...

  • The Role of Government

    In this study we outlined various ways in which insurers can cope with newly emerging systemic risks, but indicated at the same time that there may also be limits. Emerging risks may be expanding to such an extent that the limits of insurability may be exceeded. Therefore, new financing techniques and alternative compensation mechanisms other than insurance (or within insurance schemes) were examined. However, we equally made clear that even these alternatives, which were discussed in Chapter 5, may have their limits as well. A question which therefore has to be addressed is what the much debated role of government should be in the regulation of systemic risks, and, more particularly, whether the government should intervene to provide for compensation if insurance and financial markets are not capable of covering risks. This may very well happen in the case of catastrophic risks. One only has to think of terrorist attacks...

  • Recommendations

    Our recommendations will be brief. We have ended every chapter with a summary of the main results. It thus does not make any sense to repeat these summaries, which can be found at the end of each chapter. We will now simply recapitulate the most important points and formulate them as recommendations to the social actors addressed in this study – enterprises, insurers and governments. The central question for this study was how these social actors could protect themselves against expanding systemic risks. Obviously, the reader should remain aware of the limits of this study (and hence of the recommendations), since we mainly focused on the role of law and even then chiefly on the function of liability law and insurance. Also, the reader should be aware that these recommendations are set out very briefly without all the nuances and explanations. He or she should also be aware of the fact that they are formulated in a rather unbalanced manner, and should be complemented by reading the full text in the various chapters...

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