The Limits of Regulation by Insurance

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.