Recent Developments in Economic Theory and their Application to Insurance

Abstract

The very title of this paper may cause some surprise, since economic theory so far has found virtually no application in insurance. Insurance is obviously an economic activity, and it is indeed strange that general economic theory should seem inapplicable to insurance.This apparent paradox may to some extent be explained by the historic development. Actuarial mathematics and the essential scientific basis of insurance were developed into a self-contained and fairly complete theory long before economists could claim the name of science for their subject. Actuaries and other insurance people may from time to time have turned to economic theory for help on their problems. In most cases they must have turned away in disappointment, being convinced that actuarial mathematics was well ahead of general economic theory.The last point is brought out clearly in a paper on the safety loading of insurance premiums which Tauber (19) presented at the Sixth International Congress of Actuaries in Vienna in 1909. In the introduction to this paper Tauber seems to consider risk bearing as a service and appears to assume that it like all other goods and services must have a price, determined by supply and demand in the market. Tauber did not develop this idea, apparently because the economic theory of his time was utterly unable to analyse the problem. That his approach was sound, and that the problem can be formulated and solved by modern economic theory, has been indicated in a previous paper (6).During the last thirty years there has been an extremely rapid development in economic theory. The “General Theory” of Keynes (12) which appeared in 1936, is usually considered to have caused a revolution in economic theory. However, this “revolution” has not lead to any developments which seem to have an immediate application in insurance. Post- and pre-Keynesian economics are equally powerless when confronted with the problem which Tauber tried to formulate. It is therefore premature to conclude from the title of this paper that economic theory has caught up with actuarial science, and that the theory of insurance has now become a part of a general theory comprising all economic activities.