Law and Economics of Insurance

Abstract

This chapter broadly defines the law and economics of insurance. An overview of both economically oriented legal scholarship and traditional economics scholarship is provided. This vantage point reveals the centrality of certain core economic concepts to insurance law and regulation. Moreover, it suggests ways to improve the law by embracing sophisticated understandings of the economics of information asymmetries. For instance, insurance law and regulation assume that adverse selection and moral hazard are important problems in all insurance markets; however, the phenomena come in varying degrees. Thus, their magnitude is an empirical question. An equally significant lacuna in much insurance law is the absence of an equilibrium approach that anticipates insurance market reactions to legal interventions. Similarly, the specific insights of behavioral economics to understand anomalies in insurance demand and how the law might respond are emerging. The law and economics of insurance is still ripe for development.