Economic Criteria for Compulsory Insurance

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.