Institutional Constraints to Insurance

Some important institutional constraints on the existence or availability of insurance contracts come from law, custom, and the organization of the insurance market.  They usually differ in different countries according to the political or economical environment.

Regulatory Constraints

Regulations affect the availability of insurance with regards to the type of coverage that can be written and the type of institution that can write insurance contracts. For example, in most countries, insurance companies are forced by law to specialize in property and liability insurance or in life insurance.  In the early years of insurance, each line of business had to be approved separately.  From this point of view, the American regulatory tradition has been more restrictive than the British regulatory tradition. The traditions persist, even when traditionally separate lines of insurance are provided by a single company, the traditional divisions and wording of coverage exist.

Risks Insurable by Governments Only

Where the government is itself in the insurance business, it uses political means to protect its market position or to prohibit the writing of insurance contracts for certain types of coverage.  For example, health insurance is part of the Social Security system of many European countries and is operated by the State.

Market Organization

Almost all countries require by law that insurance on local insurable interest bepurchased in locally licensed companies.  There is of course a conflicting situation when the economic agent is located at a different place than the insurable interest (this is typically the case in marine insurance).

Some laws and regulations specifically prohibit the licensing of insurers or insurance operations of particular types. Whether these particular regulations have the effect of producing a shortage of insurance depends on a variety of factors.  Market imperfections may also exist concerning the availability of some types of coverages because of the limited size of the market, the small size of the companies, or the lack of expertise and know-how.

Summary

In this chapter the following issues are addressed: (1) the benefits and costs generated by the existence of insurance contracts, (2) the characteristics of insurable risks and, (3) the legal characteristics of insurance contracts. These issues are essentially conceptual in nature and provide an important background affecting the practice ofinsurance.