Ex ante loss control by insurers: Public interest for higher profit

Abstract

This article examines the incentives of an insurer to modify loss distributions prior to the sale of insurance. While actions such as lobbying Congress for mandatory airbags in automobiles are undertaken by insurers for the stated purpose of reducing the aggregate loss in society, they also change the nature of the risk being insured and, hence, affect the profitability of insurance sales. For the case of loss prevention (reducing the probabilty of a loss), insurers do not always have an incentive to invest in loss control. For loss reduction (reducing the severity of any loss that does occur), the incentive is to reduce the size of small losses while simultaneously increasing the size of large losses.