Economics Dictionary of ArgumentsHome
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| Insurances: Insurance is a contractual agreement where an individual or entity pays a premium to a company in exchange for financial protection against potential losses or risks, providing compensation for specified events like accidents, illnesses, or property damage. See also contracts, contract theory._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Nicholas Barr on Insurances - Dictionary of Arguments
Gaus I 212 Insurance/welfare state/adverse selection/moral hazard/Barr/Moon: [in a welfare state] voluntary welfare provision may (...) be unable to cover everyone in a society. Many people in the heyday of mutual aid societies were not members, and non-members were often among the least advantaged, those without steady jobs and a secure place within the community. Adverse selection: organizations offering protection recognize that those most likely to need protection have Gaus I 213 the greatest incentive to seek it, and so to join a mutual aid society or to purchase insurance, while those facing the lowest risks have an incentive to stay out. As a result of this process of 'adverse selection' , risks tend to be spread over a smaller and smaller part of the population, and premiums must rise accordingly. This process of adverse selection can continue to the point where most of those in need of protection are unable to afford it, because premiums have to rise so high that all but the most vulnerable drop out. The welfare state can combat the problem of adverse selection by making membership compulsory: 'because low risks cannot opt out, it makes possible a pooling solution' (Barr, 1992(1): 755). >Adverse Selection. Moral hazard: adverse selection is reinforced by a second process or condition, called 'moral hazard'. People who are insured against a certain risk may be more willing to take chances than they would be in the absence of insurance. Knowing that if I get sick or injured, my medical bills will be covered, may make me more willing to engage in risky behaviour, such as downhill skiing. To the extent that this occurs, organizations may face higher claims, thereby forcing them to raise their charges, and discouraging others from purchasing protection. More obviously, unemployment insurance schemes are subject to moral hazard, for knowing that I will be covered in the event that I am unemployed, I have an incentive to quit (or arrange to be fired) and/or not to seek or accept employment. Of course, state schemes are subject to moral hazard as well, but the key point is that if the genuine risk of losing one's job is to be covered at all, it must be covered through a public programme (see Barr, 1998(2): 190—2). >Moral hazard, >Free riders. For all of these reasons organizations offering protection will try to limit use, to prevent too many high risk people from joining, and to charge them more in order to hang on to their other members. In the case of voluntary groups, such as neighbourhood-, work- or craft-based mutual aid societies, informal patterns of social surveillance and affinity may function to exclude outsiders and others who are thought to be especially likely to need benefits. Similarly, private firms may use various underwrit- ing mechanisms to screen out high risk individuals or groups. The overall result may well be that certain groups may receive no or inadequate coverage, and the cost of services may be much greater than they would be if they were provided through a compulsory plan that spread risks more widely and rationed services to avoid overuse.* * An example of how a system dominated by private provision both is more expensive, and provides protection to a smaller proportion of the population, may be medical care in the US. The US spends a far higher proportion of its GDP (12.9 percent in 1998 compared with Germany's 10.3 or the UK's 6.8) on medical care than other rich countries, but fails to provide coverage for over 20 percent of its population. Ironically, public provision of medical care in the US is larger than that of the UK (5.8 versus 5.7 percent of GDP), not even counting the implicit subsidy represented by the favourable tax treatment of employer-provided health insurance (OECD health statistics). 1. Barr, Nicholas (1992) 'Economic theory and the welfare state'. Journal of Economic Literature, 30 (2): 741-803. 2. Barr, Nicholas (1998) The Economics of the Welfare State, 3rd edn. Stanford, CA: Stanford University Press. Moon, J. Donald 2004. „The Political Theory of the Welfare State“. In: Gaus, Gerald F. & Kukathas, Chandran 2004. Handbook of Political Theory. SAGE Publications_____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Barr, Nicholas Gaus I Gerald F. Gaus Chandran Kukathas Handbook of Political Theory London 2004 |
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