Question

disscuss arguments for and arguments against compulsory insurance of some risk​

Answer 1

This paper applies the economic analysis of law through the question of under what conditions should insurance be made compulsory. A distinction is made between first-party (victim) insurance and third-party (liability) insurance. It is argued that under some circumstances compulsory victim insurance may be indicated, for example, when information problems or externalities arise. The major argument in favour of compulsory liability insurance is insolvency of the potential injurer. His insolvency may lead to underdeterrence. This can be cured through making the purchase of insurance compulsory. However, equally a few limits and warnings with respect to the introduction of a duty to insure are presented. If the moral hazard problem cannot be cured or if insurance is not sufficiently available, making insurance compulsory may create more problems than it cures. Also, it is argued that a major disadvantage of compulsory insurance is that it may make governments too dependent on the insurance market.

Introduction

Regulatory interventions in insurance markets are certainly not a new phenomenon. What seems to be increasing, however, is the tendency of legislators to increasingly impose duties on market participants to obtain insurance coverage. This basic idea already originated in the early years when social security systems were introduced, but it has been expanded to the area of private insurance as well. Especially in the area of liability one can now see increasing duties laid upon potential injurers to secure themselves of sufficient liability coverage.

The arguments one hears in favour of compulsory insurance vary. Social security systems are usually defended as a means to provide a minimum amount of financial security to victims. Lawyers furthermore use this victim protection argument also in favour of compulsory liability insurance, arguing that victims should be protected against the danger of insolvency of the potential injurer. Economists as well have not only pointed out the advantages of insurance, but have also equally indicated that without sufficient solvency guarantees underdeterrence may arise and hence the accident risk could be increased.

Notwithstanding the increasing popularity of compulsory (liability) insurance one can also hear several worries and warnings both from insurers and in academic writings. One worry relates to the fact that policymakers too easily impose a duty to obtain insurance coverage; a totally different matter is whether competitive insurance markets are able and willing to provide the necessary coverage required by the law. In addition, economists have warned against the increasing use of liability insurance linked with strict liability regimes and have often pointed at the advantages of first-party insurance schemes. That argument has had its influence in actual policy since one can now clearly see a tendency to move away from third-party liability toward first-party and direct insurance schemes in various areas.