The Role of the Profit Imperative in Risk Management
17 U. Pa. J. Bus. L. 1081 (2015)
57 Pages Posted: 6 Oct 2014 Last revised: 6 Jan 2016
Date Written: October 4, 2014
Risks in the world abound. Every day there is a chance that each of us could be in a car accident. Or, one of us could be the victim of a tornado, flood or earthquake. Every day someone becomes deathly ill from an insidious disease. Our properties are in constant peril – one’s house could catch fire at any time or a tree could fall on it during a storm. Any one of these events could have devastating financial consequences, and they are just a few of the many risks that surround our daily lives. One of the principal ways we manage risk is by purchasing insurance. In the absence of insurance, many losses would cause financial ruin. Thus, for some lines of insurance such as health and homeowners, insurance serves a critical function in America as a social safety net.
This Article explores the role the profit imperative has and should have in risk management today. As publicly traded stock companies, which are driven by the profit imperative, have come to dominate the insurance industry in the past two decades, inherent conflicts between the purpose of insurance and the goal of insurers have developed. These conflicts are manifested by insurers’ refusal to insure certain people and businesses and the hollowing out of the coverage provided by insurance policies through the addition of exclusions for risks of loss that insurers have concluded do not provide adequate profit margins. The profit imperative also has forced insurers and their policyholders to become adversaries with respect to the valuation and payment of claims because every dollar paid for a policyholder’s loss is a dollar that cannot be paid to the insurer’s shareholders.
After discussing the history of these conflicts, the Article then explores various ways to resolve them. Some of those ways are: the elimination of some exclusions in policies, the creation of restrictions on insurers’ ability to refuse to insure certain people and businesses, and the imposition of penalties when insurers fail to pay claims timely and in full. For socially critical lines of insurance, if any voids in insurance markets were to develop due to the current laws being changed in the ways discussed in the Article, then state sponsored insurance programs could be created to fill the voids.
Keywords: insurance, risk management, natural catastrophes, profit imperative, stock companies, adverse selection, correlated risks, moral hazard
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