Unbundling Risk

Abstract

Scholars have explored many ways to rearrange risk outside of traditional insurance markets. An interesting literature addresses a range of innovative alternatives, including the sale of unmatured tort claims or chances at windfalls, “anti-insurance” or “reverse insurance,” and index-based derivatives that address routine (but life-altering) risks, such as those to home values or livelihoods. Because most of this work grows out of a conviction that specific risk allocations embedded in law could be improved upon, the merits of the newly proposed risk arrangements have taken center stage. This paper, in contrast, examines questions surrounding risk customization itself, such as the optimal amount of stickiness in society's default risk allocations, the effects of heterogeneity in risk arrangements, and the implications (cognitive and otherwise) of starting from one risk baseline rather than another. My analysis focuses on risks faced by individuals and households, where gaps and asymmetries in risk customization opportunities are most pronounced, and where cognitive considerations loom large. The paper develops a taxonomy of risk shifting moves that illuminates inconsistencies in existing patterns of blocked and missing risk markets and directs attention to untapped policy design alternatives.

Keywords: risk, insurance, reverse insurance, anti-insurance, unmatured tort claims, defaults, framing