Tag: insurance

  • Insurance Redlining and Transparency

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    Daniel Schwarcz

    Insurance nerds like to point out that insurance coverage is a pre-requisite to a wide range of activities, from starting a business to practicing medicine to driving a car.  In this sense, insurers often serve as gatekeepers to fundamental social privileges.  Nowhere is this more starkly illustrated than in the residential real estate context.  As one court succinctly put it: “No insurance, no loan; no loan, no house; lack of insurance thus makes housing unavailable.”  

    Given the centrality of both credit and insurance to home ownership, one might expect that the rules in these two domains would similarly respond to the risk of redlining, which is the practice of denying or charging more for services in residential areas with large minority populations.  But as with coverage terms and claim handling, quite the opposite is true: whereas bank regulation has embraced transparency, insurance regulation has actively rejected it.  

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  • Purchasing Insurance as a Game of Chance: What Does Your Homeowners Policy Cover?

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    Daniel Schwarcz

    The core product that insurance consumers buy is a standard form contract.  Unlike virtually any other market, though, it is virtually impossible for purchasers of personal lines coverage (i.e. homeowners, renters, and auto insurance) to scrutinize this product before they purchase it.  Insurers only provide consumers with an actual insurance contract several weeks after they purchase coverage.  They generally do not make sample contracts available to consumers on the Internet or through insurance agents.  Marketing materials and other secondary literature from regulators and consumer organizations provide virtually no guidance about how different carriers’ policies differ.  And most states have essentially zero laws requiring insurers to provide any types of pre-sale disclosure to consumers regarding the scope of their coverage. 

    How can this possibly be?  

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  • Consumer Protection Strategies in Credit and Insurance: Why the Disconnect?

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    Daniel Schwarcz

    Many thanks to Credit Slips for inviting me to guest blog over the next week or so.  My hope during this time is to explore what I view as an important puzzle in consumer protection regulation: why it is that consumer protection strategies in insurance and credit are so different in the United States.  

    From a consumer protection perspective, credit and insurance are intimately related.  At its core, consumer protection regulation in both domains is motivated by the fact that consumers routinely engage in complex financial transactions that they may not fully understand or appreciate.  And in both domains, firms or market intermediaries can exploit this fact to make additional profits in the short term, though such a strategy creates long-term legal and reputation risks.  Despite these similarities, consumer protection regulation in credit is predominantly concerned with disclosure and transparency whereas consumer protection regulation in insurance almost entirely ignores these tools in favor of more prescriptive regulatory approaches. 

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  • Fund Manager Fraud Insurance

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    Adam Levitin

    The Bernard Madoff scandal in which perhaps $50 billion of investor funds were lost due to fraud has left me perplexed.  In addition to market risk, against which investors can hedge, we also see that investors (even, or perhaps especially investors in exclusive investment funds) can face catastrophic fraud risk.  Why haven't some of the insurance companies responded with fund manager fraud insurance?  Insurance, after all, is the proper response to rare, unpredictable, and catastrophic events.  

    If you're going to put millions into a single fund, you're trusting the fund manager not only to make good investment decisions, but also not to steal your money.  These are different types of risks.  The first is easier to monitor than the second, and generally less catastrophic.  The second seems more suitable for insurance than the first, yet we have all kinds of specialized credit derivative products that function like insurance, but we don't (at least to my knowledge) have insurance for the later (maybe Lloyd's does?). 

    Perhaps investors eager for higher yield don't want to lose a few bp on insurance, and perhaps the insurance companies can't work out the actuarial risk of something as unpredictable as fraud. Still, I would think that at least institutional investors, like pension plans and charitable trusts, would have, as part of a prudent investment duty, to purchase insurance against fund manager fraud.  This seems like a market niche that really should be filled.