The Limits of Regulation by Insurance

68 Pages Posted: 26 May 2022 Last revised: 25 Jul 2022

See all articles by Kenneth S. Abraham

Kenneth S. Abraham

University of Virginia School of Law

Daniel Schwarcz

University of Minnesota Law School

Date Written: May 25, 2022


Insurance is an enormously powerful and beneficial method of spreading risk and compensating for loss. But even insurance has its limits. A new and misleading aspiration for insurance – that it also can and often does substitute for or significantly complement health and safety regulation – is increasingly in vogue. This vision starts from the uncontroversial recognition that insurers typically adopt measures designed to counteract "moral hazard," the tendency of insurance to blunt policyholders’ incentives to take care. But proponents of this vision go on to contend that the risk-reducing potential of insurance is significantly more extensive than is traditionally imagined, because insurers are strategically-positioned to induce their policyholders to embrace precautions, procedures, policies, or training regimens that decrease the incidence of loss. Proponents of this new "regulation thesis" often dramatically summarize these points by describing insurance as a form of private "regulation” or “loss prevention,” attempting to trade on the positive optics of these notions. Enamored with this idea, commentators, activists, and lawmakers have advanced various proposals to mandate the purchase of insurance or otherwise intervene in insurance markets to address a broad range of modern social ills, including police misconduct, gun violence, cyberattacks, and harms caused by artificial intelligence. Building on emerging criticism of this regulation thesis as well as increasing empirical evidence questioning its accuracy, this Article argues that these regulatory aspirations for insurance are over-optimistic. Creating less loss than insurance otherwise might have created is not regulation or loss prevention. Rather, it is damage-control, and that is what insurance devices designed to combat moral hazard almost always involve. Insurers face a daunting set of obstacles to further reducing policyholder risk below what it would be in the absence of insurance. In short, insurance has substantial limits as a solution for the failures of regulation.

Keywords: Insurance; Regulation; Regulation by Insurance

Suggested Citation

Abraham, Kenneth S. and Schwarcz, Daniel, The Limits of Regulation by Insurance (May 25, 2022). 98 Indiana Law Journal (2023), Virginia Public Law and Legal Theory Research Paper No. 2022-34, Virginia Law and Economics Research Paper No. 2022-06, Available at SSRN:

Kenneth S. Abraham (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States
434-924-3616 (Phone)
434-982-2845 (Fax)

Daniel Schwarcz

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States


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