Economic Criteria for Compulsory Insurance

25 Pages Posted: 1 Apr 2007

See all articles by Michael G. Faure

Michael G. Faure

University of Maastricht - Faculty of Law, Metro; Erasmus University Rotterdam (EUR) - Erasmus School of Law

Date Written: October 2005

Abstract

This paper applies an economic analysis of law to the question under what conditions insurance should 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 valid e.g. 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 ensure are presented. If the moral hazard problem cannot be cured or if insurance is not sufficiently available making insurance compulsory may solve more problems than it cures. Also, it is argued that a major disadvantage of compulsory insurance is that it may make governments too dependant on the insurance market.

Keywords: Liability, insurance, information problem, insolvency, compulsory insurance

JEL Classification: K10

Suggested Citation

Faure, Michael G., Economic Criteria for Compulsory Insurance (October 2005). Maastricht Faculty of Law Working Paper 2005-4, Available at SSRN: https://ssrn.com/abstract=977463 or http://dx.doi.org/10.2139/ssrn.977463

Michael G. Faure (Contact Author)

University of Maastricht - Faculty of Law, Metro ( email )

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Maastricht, 6200 MD
Netherlands
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HOME PAGE: http://www.michaelfaure.be

Erasmus University Rotterdam (EUR) - Erasmus School of Law ( email )

3000 DR Rotterdam
Netherlands

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