Routledge Dictionary of Economics, Second Edition
A method of sharing risks. Originally it was chiefly concerned with insuring shipping, the riskiest of business ventures in earlier centuries, but the principle was extended to cover all types of risk, including damage to property, personal injury and death. The fairest type of insurance is where the cost to the insured of premiums and the cost to insurers of administration do not exceed the total payout on risks which have occurred.
However, the MONOPOLY POWER of many insurers permits them to make excessive profits. The government insures some risks in the public sector and should, it is argued, underwrite personal injury compensation in the private sector. Insurance against risk is not universal. Its absence can be explained on the grounds of MORAL HAZARD as insurance induces recklessness and of adverse selection as only the worst risks apply for insurance.
References
Borch, K. (1988) Economics of Insurance, Amsterdam: North-Holland.
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