TOM BAKER, University of Pennsylvania Law School
Email: tombaker@law.upenn.edu

This essay explores how liability insurance mediates the boundary between torts and crime. Liability insurance sometimes separates these two legal fields, for example through the application of standard insurance contract provisions that exclude insurance coverage for some crimes that are also torts. Perhaps less obviously, liability insurance also can draw parts of the tort and criminal fields together. For example, professional liability insurance civilizes the criminal law experience for some crimes that are also torts by providing defendants with an insurance-paid criminal defense that provides more than ordinary means to contest the state's accusations. The crime-tort separation in liability insurance cannot be explained by economic incentives, alone. Morality matters, too. The fact that liability insurance sometimes provides coverage for criminal defense costs suggests that liability insurance institutions could cover a broader swath of crime torts than they do, providing further support for the claim that consequentialist reasoning, alone, cannot explain the observed relationship between liability insurance, torts, and crime. The tort-crime separation reflects and reinforces a concept of liability insurance as protection for defendants, rather than as a fund for victims. In turn, this concept of insurance reflects and reinforces an understanding of tort claims as encounters between particular plaintiffs and defendants, rather than as a price setting or loss spreading insurance mechanism.

DIMITRIS BERTSIMAS, Massachusetts Institute of Technology (MIT) - Sloan School of Management
Email: dbertsim@mit.edu
PREMAL SHAH, University of Cambridge - MIT Institute
Email: premal@mit.edu

In this paper, we present an analysis of the 'Guaranteed Withdrawal Benefits' (GWB) for life option, a recent and popular product that many insurance companies are offering as a retirement planning solution. Under the GWB for life plan, the investor is promised increasing withdrawals during retirement for her lifetime, while still being invested in the markets. GWB for life thus transfers financial and longevity related risks from an individual investor to the insurance company underwriting the guarantee. We first analyze a continuous time version of this product in a Black Scholes economy with simplifying assumptions on population mortality and obtain an analytical solution for the product value. This analysis reveals the high sensitivity the product bears to several risk factors. We then price the GWB in a realistic setting using different asset pricing models, including those that allow the interest rates and volatility of returns to be stochastic. Our analysis reveals that 1) GWB has insufficient price discrimination and is susceptible to adverse selection and 2) valuations can vary substantially depending on which class of models is used. We believe the ambiguity in value and the presence of significant risks, which can be challenging to hedge, should create concerns to the insurance companies offering the GWB, their investors and clients as well as the regulators.

SEAN D. EHRLICH, Florida State University - Department of Political Science
Email: sehrlich@fsu.edu

The political economy of trade literature argues that the policy of compensating those who lose from trade is an important component of maintaining public support for free trade, a linkage known as the embedded liberalism thesis. This article tests the causal mechanisms underlying embedded liberalism by examining support for trade-related compensation using survey data from the United States. The results show mixed support for embedded liberalism: while those who expect to be harmed by trade support compensation, as expected, those who expect to gain do not. Further, the expected effect of trade strongly predicts support for trade-related unemployment insurance but has no influence on support for general unemployment insurance.