The Dark Side of Insurance

1.1.1.1 Why Insurers Fail to Engage in Direct Risk Regulation

We start by providing several theoretical explanations for why in contrast to the conventional wisdom, insurers do not directly regulate to reduce risks. First, as Kyle Logue identifies and illustrates through negligent inspection law, direct regulation may increase insurers’ liability. Under negligent undertaking law, if an accident occurs after the insurer has regulated enough to have legally “undertaken” the insured’s responsibility for safety incidents, the insurer has dramatically increased its liability for the incident (Logue 2015).

The second reason insurers do not engage in direct regulation is that in cases like Corporate Directors and Officers (“D&O”) insurance, if insurers engage in direct regulation or even raise awareness of potential risks, they can increase their insureds’ liability. Specifically, D&O insurers neither require insureds to adopt any practices nor monitor insureds’ behavior; many such insurers do not advise insured on any loss-preventing practices, as a director’s awareness of the risk in itself can give rise to liability down the line if a loss does occur (Heimer 2013). In D&O insurance, insurers notoriously “do almost nothing to monitor the behavior of the corporations that they insure.” (Abraham 2011).

Finally, if insurers’ regulation is effective, it creates two types of positive externalities; one for other insurers who now know how to improve their insureds’ risks, and another one for insureds, since the safety regulation reduces their risk to the point that possessing any insurance at all may not be necessary (Cohen 1997). And, as is well known, whenever positive externalities are involved, under-provisions of safety regulation are likely unavoidable.

The next sections address the question of what can explain insurers’ motivation to regulate insured’s behavior in the occasions they do so. We stress that even in instances when insurers oversee their insured’s behavior, they are likely to strictly adhere their advice to the rules set by preexisting—often outdated—legislation, thus failing to fully fulfil their potential to privately regulate.

1.1.1.2 Self-Interested Interpretation of Existing Legislation

We now turn to the argument that even when insurers directly instruct their insureds, often it is not for the purpose of getting them to efficiently invest in precautions. Quite the contrary, insurers may distort the interpretation of existing legislation they provide to their insureds, which in turn leads to suboptimal incentives to take care. Punitive damages serve as an excellent example. Although many states prohibit insurers from providing coverage for punitive damage, insurers often include venue clauses or jurisdictional clauses that ultimately enable such coverage to be provided (Talesh 2015). However, coverage for punitive damages may well decrease deterrence, and that, from insurers’ perspective, may ultimately result in more demand for insurance coverage.

Insurers similarly frame their discussions of U.S. Supreme Court decisions “around shifting risk and avoiding liability.” Consider insurers’ recent focus on interpreting a Supreme Court decision, Vance v. Ball State, in which the Court narrowed the definition of “supervisor.” In Vance, the question was whether a coworker who is vested with the authority to oversee the daily work of another worker is considered a “supervisor” for the purpose of determining employer liability for harassment under Title VII. Rather than developing an understanding of the supervisor’s role under this new regime, insurers generally offer recommendations for employers that would better situate the insurer to avoid liability or defend a case should an incident arise. This type of interpretive discretion is concerning, as insurers become chiefly focused on legal risk-management instead of loss prevention, providing a service that “leans more toward making claims defensible rather than fostering a discrimination-free workplace.” (Talesh 2017).

1.1.1.3 Other Motives to Regulate (Inadequately)

Omri Ben-Shahar and Kyle Logue explore the argument that insurers are motivated to reduce liability through loss-reduction by cataloging multiple real-world examples. These examples center on using premium reduction or other methods to regulate areas where the government has not intervened, such as through homeowner’s insurance. However, several of Ben-Shahar and Logue’s examples only reveal the potential for insurers to perform private regulation, without satisfactorily showing that insurers actually regulate insureds and prevent loss. For instance, their best example for loss-reduction is environmental liability insurance, which Ben-Shahar and Logue identify as a “striking example” of insurers reducing moral hazard and loss. They argue that insurers seek to reduce liability through loss-reduction by offering site-specific environmental coverage and ensuring licensing and regulation compliance, enforcing government regulation compliance, and even going beyond minimal government standards to promote stricter safety (Ben-Shahar and Logue 2012).

However, we note four problems with this view. First, if the environmental liability insurance example works as Ben-Shahar and Logue claim it does, it merely exemplifies our prior point that insurers pay significant attention to extreme correlated losses (indeed, the potential liability for an environmental harm can be enormous), but will not refrain from shifting medium and smaller losses to preserve the demand for insurance. Second, there is no broad consensus that insurers (at least those operating in the United States) always realize their full potential to mitigate environmental risk even when it relates to large correlated losses. Such is the case with climate change. In 2018, the Asset Owners Disclosure Project provided an analysis of the world’s eighty largest insurers rated on their approach to climate-related risks and opportunities. Twenty-four of the eighty were US insurers, and twenty-one of those insurers scored the lowest. They are viewed as “bystanders” for failing to consider the financial impact of climate change (Asset Owners Disclosure Project 2018).

Third, while insurers’ actions may incidentally result in loss-reduction, loss-reduction is not the motivating factor to enact such policies. While this reality may be convenient for now, it means that insurers have no reason to maintain this incidental loss-reduction and that these loss-reduction practices can disappear as soon as cheaper liability reduction measures emerge.

The fourth and greatest problem is that we have no reason to assume that the regulations or other metrics insurers use are optimal. The literature on regulation has made clear that government-provided regulation is problematic; among other shortcomings, scholars have noted administrations’ hostile agendas, regulatory capture, and the inability to update the regulation in a timely fashion (Avraham 2009).

Against all this, one might wonder whether firm competition would not eventually solve the current unsatisfactory condition of insurers’ lax private regulation. After all, firms are known to operate in a cartel-like environment and might have inherent incentives to deviate from the rest of the pack and offer better, cheaper products to gain market power. Although it is possible that heightened competition would eventually ease the severity of the inefficiencies in the insurance market, notably, insurers have strong instruments in place – such as NAIC-to secure their long-term collective interest (Randall 1999). In Part II below we demonstrate how insurers accomplish this, for example by lobbying against risk-reducing technological progress.

In sum, in this section we rebutted the myth of risk reduction by focusing on ways insurers omit to take efficient actions that would reduce the risk generated by their insureds. The next section will focus on practices insurers actively engage in to prevent their own liability under the policy by shifting losses onto the insureds and third parties, further disproving the myth of effective loss reduction.

1.1.2.1 Contractual Manipulations

The most notorious example of how insurers shift loss onto the insured is through policy-term misdirection. The idea of contractual manipulations or deceptive contracting that violates consumer expectations was recognized at least since the case of C & J Fertilizer Inc. There the Supreme Court of Iowa ruled that a policy that violates the reasonable expectations of the policyholder is unconscionable, and should be interpreted from the viewpoint of an ordinary person (C&J Fertilizer Inc. v. Allied Mut. Ins. 1975).

Loss shifting occurs when insurers place liability-limiting terms into a policy without pointing those terms out to a potential insured, or in such a way that it is impracticable and unlikely for a potential insured to see the terms. Normally, these liability-limiting terms may be justifiable, for instance, in that they might reduce moral hazard. However, such a regulating effect is only realized when the insured knows about the term, and thus can make an informed decision to adjust future behavior in compliance (Schwarcz 2014). This means that as no precaution is being taken to limit the harm that the insurer has disclaimed liability for, the insurer is merely shifting the loss onto the insured, rather than actually reducing it (Schwarcz 2017).

1.1.2.2 Apology Law and the Sorry Works! Coalition

Another example that highlights insurers’ concern with reducing liability regardless of loss is the Sorry Works Coalition (“Sorry Works!”). Sorry Works! is a development of “apology law,” which includes “laws designed to privilege apologies made by injurers” by making the apologies inadmissible at trial (Arbel and Kaplan 2016). In other words, these laws prohibit the use of physicians’ apologies as a legal admission of fault. Moreover, as Baker and Silver note, some of the leading figures heading these programs and occupying their boards are (you guessed it …) insurance executives (Baker and Silver 2019). Apology laws spurred a 60% reduction in hospital payments to victims, roughly $32,000–$73,000 per case. These astounding reductions are explained through victims’ documented desire to receive an apology, leading to a greater willingness to settle once the apology is received. Moreover, apology laws and the resulting payout reductions prompted many commercial players to engage in a highly orchestrated, commercialized practice of apologizing complemented by apology training, psychological techniques, and professional guidance to create the most effective apology at the lowest cost. Apology law and Sorry Works! are often featured as positive methods to meet both patient and insurer interests—i.e., reducing insurer liability while satisfying patients’ need for compensation through the apology. Observing the orchestrated system of apology law through Sorry Works! demonstrates that insurers are motivated and exert efforts to ultimately reduce liability only, making any consequential loss-reduction incidental and unrelated to insurers’ primary interests. Although one might think that apologies really do mitigate emotional harm due to their therapeutic value—and as such, are an efficient loss-reduction tool—scholars argue that the real motives for victims’ decision to settle are much less auspicious; indeed, several apology practices are meant to “create emotional pressure on victims to accept them, a decision that the victim will later come to regret.” Apology programs not only fail to diminish loss, they might even increase risk. Specifically, as healthcare providers know they can easily escape liability by later generating an apology, their incentives to take care decrease. Thus, notably, even if apology programs actually do carry some potential to reduce emotional harm ex-post, they still distort doctors’ incentives to take proper care ex-ante. This example shows that even if harm mitigation is an incidental benefit of apology programs, insurers are primarily focused on liability reduction through loss-shifting, in this case shifting loss onto the patient, and remain at best indifferent to actual loss-reduction practices for future patient safety events (Arbel and Kaplan 2016).

1.1.2.3 Dash Cameras

Consider an example recently analyzed by Yotam Kaplan and Yonathan Arbel (2016): dashboard cameras (“dash-cams”). Insurers encourage drivers to use dash-cams, which sounds like a good policy to encourage safer driving, much like smoke alarms. However, at least until every car has them, dash-cams merely shift risks to the other drivers, thereby diluting the incentives of the insured drivers to take precautions. Why? Because insureds know that if the accident is their fault, they can argue that they did not have a camera or that it did not work, thus improving their chance to escape liability. On the other hand, if the accident is not their fault, then insureds can use the camera as proof, again improving their chance to escape liability.^[8] The option for such a strategic use of the dash-cam might lead insured-drivers to drive less carefully. The important point is that insurers only care about the fact that their own insureds escape liability (losses were shifted to the other driver) and do not care that driving becomes more dangerous. In fact, they might benefit financially from it.

Our discussion so far has demonstrated that the myth contending that insurers habitually engage in risk reduction is not always true; many times, insurers do not reduce risk, but merely reduce the payouts they will owe for the materialization of such risk. Of course, in the long run such practices may indirectly increase risks in society. For example, instructing employers on how to escape liability by making sure their supervisors are not deemed legally as supervisors is problematic in the long term not just because the victims are left to bear the losses, but also because this practice leads to suboptimal behavior, to more harm, and (importantly from the insurers’ perspective) to increased demand for insurance coverage. In the next Part we revisit this example and explore the more radical and concerning claim that insurers have an intrinsic, long-term interest in maintaining sufficient levels of risk within society. We demonstrate this claim through additional direct evidence.

1.2.2.1 Kidnapping and Ransom Insurance

Kidnapping and ransom insurance coverage (“K&R”) exemplifies the phenomenon that insurers seek to increase risks in the world by fueling third-party moral hazard. K&R is an insurance coverage plan designed for wealthy individuals and those who travel frequently and are thus at risk of getting kidnapped (Bell 2015). K&R policies, offered by dozens of insurance companies, typically cover “ransom payments, loss of income, interest on bank loans,” and medical and psychiatric care.^[12]

K&R demonstrates insurers’ long-term interests in increasing and maintaining risk, because the coverage for negotiated ransom and other costs arguably energizes more kidnappings and thereby fuels the kidnapping industry (Clendenin 2006). Specifically, the existence of K&R results in “an unintentional conspiracy” between “the terrorist, the victim, and the insurance companies” because as long as K&R exists, the kidnappers continue to be paid, victims continue to purchase insurance, and the insurance company continues to receive premiums. This exchange perpetuates the cycle beyond what may have been if insurers were not providing continuous and definite payouts for the kidnapping victims. But the problem does not end with the mere existence of insurance; insurers’ behavior before and after the occurrence is problematic as well.

After the occurrence, insurers are “softer” with kidnappers than one would expect, paying out and conceding as a matter of policy. Indeed, insurers’ unwillingness to cooperate with U.S. government hostage-crises stances of being “tough” on kidnapping further supports their interest in increasing risk. The Department of State holds that making concessions to hostage takers ultimately increases the danger that others will be taken hostage and thus prohibits concessions when government employees are kidnapped. The Department of State is clear that any U.S. private organizations engaging in hostage resolution in a manner differing from U.S. government policy undertake such action without U.S. approval (Clendenin 2006). Despite this clear policy and warning that concessions lead to future hostage takings, K&R insurers continue to concede, potentially enabling kidnapping for the sake of K&R premiums.^[13]

Anja Shortland, on the other hand, who has extensively studied the K&R insurance market suggested that the K&R market is governed by, effectively, a cartel that keeps payments to kidnappers at levels that are not too high (Shortland 2019). We conjecture however that insurers make sure that payments are neither too low.

Insurers’ behavior seems suboptimal not just after-the-fact. Indeed, a big puzzle is why insurers do not focus on kidnapping-reduction or rescue missions rather than on ransom negotiations (Prochnau 1998). Insurers’ tendency to resolve the extortion risk only after the action has occurred, rather than make preventative efforts prior to a kidnapping incident, furthers the argument that insurers’ primary interest is to continue fueling the “unintentional conspiracy” (or tacit collusion) of kidnapping and extortion to serve their intrinsic interest of increasing or maintaining risk in the world.

To be sure, there is a short-term/long-term tension here: insurers still have an interest in lowering payout in individual cases. Indeed, many K&R plans may be voided if unnecessarily revealed to the kidnappers; this is because insurers know that such disclosure creates incentives for kidnappers to target their insureds and demand higher ransoms from them specifically. As insurance companies would like to limit their own liability, they take precautions to keep their involvement undisclosed, even in negotiations (Prochnau 1998). And yet, the idea that K&R incentivizes kidnappings is so clear that in some countries K&R insurance is banned to prevent increases in the extortion market and harm to travelers (Parchomovsky and Siegelman 2022).

1.2.2.2 Cyber Insurance

Insurers’ interest in fueling third-party moral hazard is also present in ransomware attacks and payouts from cyber insurance. Ransomware is a malicious software that locks and encrypts a users’ data until the user pays ransom to restore access (Fruhlinger 2018). Ransomware attacks vary in harm, but common to all is a ransom demand associated with the data takeover. Insurers have developed cyber insurance plans to protect users against these attacks; indeed, this model is eerily similar if not exactly identical to the K&R model. Just like K&R, cyber insurers effectively incentivize ransomware attackers by providing a certain payout for their attack (Murphy 2017). Just like our theoretical framework predicts, this cycle consequently fuels the ransomware practice, ultimately increasing the number of ransom attacks. In fact, the number of cyberattacks increases annually, leading to greater claim frequency, premiums and profit for insurers.

Insurers’ disregard for increased risk in the world is supported by cyber insurance policies that lack essential characteristics intended to prevent ransom attacks—thus further solidifying the claim that insurers are not only aware of the issue of third-party moral hazard, but also fuel it. For example, few cyber insurance policies require security software or policies, security system vetting, or an audit of the organization. Very rarely do insurers base premiums on the presence or lack of such measures.^[14] Indeed in a recent article Tom Baker and Anja Shortland argue that these kinds of loss prevention techniques are not cost-effective for insurers (Baker and Shortland forthcoming).

However, Kyle Logue and Adam Shniderman argue in a recent article that the “common sense intuition” that the availability of cyber insurance increases ransomware attacks and that it makes cyber-attacks more profitable, is inaccurate. The authors suggest that cyber insurance may increase social welfare because of two major properties: the risk-spreading benefits may be greater than the moral hazard harms, and insurers may implement ex-ante and ex-post regulatory measures to reduce losses. However, as the authors themselves admit various market failures prevent these benefits from materializing (Logue and Shniderman).

1.2.2.3 Health Insurance

Perhaps the clearest example of third-party moral hazard lies within the health insurance industry. One salient example is physicians’ and providers’ widespread practice of recommending and administering procedures that have little-to-no medical value and cause overutilization of the health care services (Silver et al. 2018).

Indeed, over utilization can happen for many reasons. The two important ones are defensive medicine, where physicians provide (and health insurers cover) excessive care to avoid legal liability, and offensive medicine (what economists call-induced demand) where physicians pursue excessive care to maximize their reimbursements (Avraham 2009). As Charlie Silver and David Hyman have shown, “only 10–20% of the medical procedures used” have had proper clinical trials to determine if they are medically effective. The mere existence of health insurance incentivizes physicians to administer and recommend even those procedures that have not undergone adequate scrutiny, because if the patient has insurance s/he does not bear the cost and the physician herself may profit from it. Indeed, it has been estimated that the costs associated with offensive medicine are much higher than the costs associate with defensive medicine (Avraham 2009, pp 560).

Consider percutaneous vertebroplasty, which is a procedure that involves injecting bone cement into the spine to treat vertebral fractures. As of a decade ago, it was well publicized that this procedure is essentially worthless. However, insurers would still cover the costs of the procedure; consequently, physicians still provided the procedure. The reason for coverage may be twofold: (1) more procedure payouts creates more profits for the insurers, as they receive back a small percentage of each payout directed at covering medical procedures; and (2) facilitating a false need for medical procedures incentivizes patients to purchase insurance by maintaining high enough perceived risk levels to support the insurance business (Silver et al. 2018). Notably, these unnecessary procedures carry risk, even if mild (Al-Nakshabandi 2011). As of today, recent studies found that percutaneous vertebroplasty does have some advantages in treating a specific uncommon disease (Xiao et al. 2021), but this understanding does not apply to all complications, and was not known in the last decade. The results were a continuous subjecting of patients to risk without reason, solely to sustain business and profit. These interests cause insurers to develop coverage policies that give physicians and treatment centers strong financial incentives to continue procuring these unnecessary or ineffective tests and treatments, thereby perpetuating the cycle. Thus, just like K&R or cyber insurance, unnecessary and ineffective tests and procedures in the healthcare industry amount to another way in which insurers can and sometimes do increase risk through third-party moral hazard.

Overall, the phenomenon of insurers fueling risk through third-party moral hazard is rife in the healthcare field. The rise of HMOs in the past decades is best explained as an attempt by society to combat this phenomenon; but, as Silver and Hyman explain, this attempt ended with a “managed care backlash,” which “made it clear to insurers that there would be real costs in trying to reduce health care providers’ revenue streams.” (Silver et al. 2018).

1.2.3.1 Autonomous Vehicles

The claim that insurers might be better off with a more dangerous world could best be illustrated by their reaction to autonomous cars.^[15] Reportedly, autonomous cars will reduce fatal traffic accidents by 90 percent. With the introduction of driverless cars, the insurance industry’s largest segment of coverage would shrink an estimated 60% by 2050 (Hammond 2018). Not surprisingly, insurers are already claiming that there are issues when drivers rely too heavily on autonomous systems (Cellan-Jones 2018).

Moreover, insurance companies are pushing against the adoption of autonomous vehicles in multiple arenas. For example, insurance companies are putting insurance pricing pressure on the consumer. At least some companies are charging higher premiums for autonomous vehicles, with premium quotes reaching up to $10,000 a year to insure a Tesla vehicle (Tullis 2019). One could argue that the increased price of the technology justifies this cost; however, even for luxury vehicles, insurance barely broaches the range of $4000 (Vallet 2019). This price difference may suggest that insurance companies have a strong aversion towards insureds having autonomous vehicles.

Insurance companies have also been lobbying on regulations for autonomous vehicles (Levin 2018). In 2018, GM launched a petition with the National Highway Traffic Safety Administration (NHTSA) to seek regulatory changes that would allow their fully autonomous vehicles on the market (Shepardson 2019). When the NHTSA put the petition out for public comment, insurance companies advocated for more regulations, for more data being collected before these autonomous vehicles made it onto the roads, and even for a complete denial of the petition. The Insurance Institute for Highway Safety (IIHS), a group funded by a multitude of insurance companies, said that GM should not be allowed to withhold safety features such as high-beam headlights from their autonomous vehicle designs. On the surface this would seem rational, until one recalls that autonomous vehicles do not have a need for high-beam lights, using radar and lidar sensors instead. Such features, while useful for human drivers, may well serve only as a regulatory and cost barrier for autonomous vehicles.

The federal government is “all in” on autonomous vehicles, indicating enthusiastic support without adding new regulation (Shepardson 2020). The Advocates for Highway and Auto Safety, a group at least partially directly funded and run by insurance companies, responded negatively to the government’s position, calling its response inadequate for public safety. As the next section shows, this is not the first time the insurance industry puts its interest first.

1.2.3.2 Passive-Restraint Battle

Another example of how insurers utilize institutional power to object to risk-reducing technology is their reaction to passive restraints (airbags and seat belts) in the 1970s and 1980s. Ben-Shahar and Logue bring this example to demonstrate that insurers can increase safety in the world. While ultimately auto-insurers led the charge in lobbying and promoting mandatory passive restraint laws, the picture is more nuanced. Insurers fought for these laws through litigation, leading to a unanimous Supreme Court decision in favor of passive restraints and a decision from the Secretary of Transportation that all newly manufactured cars must include passive restraints (Kneuper and Yendel 1994). Car manufacturers initially favored neither seatbelts nor airbags because both make cars more expensive, but ultimately decided to go with seatbelts because they were the cheaper of the two. In contrast, insurers strongly supported airbags while providing “at best only lukewarm support for seat-belts.” At first blush, it seems insurers should have been interested in advocating for both airbags and seatbelts to decrease total insurance claims; but upon closer inspection, supporting only air bags presented a much more profitable strategy. Specifically, air bag technology required insurers to deem a car with deployed air bags as a “total loss” due to the need to repackage the airbag after deployment. Insurers preferred total losses in car crash contexts because they represented a certain loss in property damage, compared to volatile bodily injuries. So, even though promoting seatbelts would translate into a dramatic reduction of bodily injury claims, insurers could significantly increase the number and certainty of property losses across all accidents if more airbags deployed. At the end, the insurance industry won the battle and car manufacturers needed to install airbags (Lemov 2015).

The point to pull from this battle is how insurers were willing to achieve their long-term goal of airbag mandates even if it meant sacrificing seatbelt restraint mandates—i.e., additional loss prevention—along the way. This history illuminates the concerning dynamic of insureds valuing their own long-term financial interest over the safety interests of their insureds and the world at large.

1.2.3.3 Genetic Testing

Another concerning example is insurers’ objection to genetic testing and coverage for genetic testing. Consider BRCA (commonly known as the ‘Angelina Jolie’) gene. Blood testing can detect mutations for the gene that have been associated with breast and ovarian cancer, allowing women who are at risk for an inherited breast or ovarian cancer gene to act proactively to mitigate risk of the cancer manifesting. In 2015, insurers raised concerns about the utility of genetic tests and limited doctors’ ability to order tests, even though screening for BRCA can save lives.^[16] This was not the first time insurers objected to such technological progress. Insurers in the past have “vehement[ly] object[ed]” to genetic nondiscrimination legislation, most notably the Genetic Information Nondiscrimination Act (GINA) (Rothstein 2008). GINA prevents insurers from requiring genetic tests or inquiring about results in making coverage decisions. Fortunately, GINA overcame these objections and was eventually signed into law. Because genetic testing is used to prevent or mitigate illness and disease, failing to pass GINA would have increased patients’ overall risk (Sandler Alfino and Saleem 2018). Insurers framed their objections to genetic testing as a legitimate concern for the stability of the insurance industry. Genetic tests threaten to send health insurance industries into a “death spiral” or at least “perturb the market,” (Kolata 2017) given the risk arising from adverse selection. Namely, those who take cheaply administered genetic tests will discover an impending illness and then insure against such illness, making it more difficult for insurers to manage risk pools (Avraham Logue and Schwarcz 2014). These insurers’ claims make sense in theory, but are much less convincing in practice as the reality is that genetic testing does not really place at risk the stability of the insurance industry, making insurers’ disapproval indicative of their interest in hindering risk-decreasing technologies. First, the demand for health insurance is consistently found to be price-inelastic, such that the likelihood of low-risk individuals dropping their health insurance is very small (Ringel et al. 2002); and second, because GINA prevents all insurers from utilizing genetic information, the risk of cream-skimming by other insurers simply does not exist. Indeed, GINA has existed for over a decade without any visible risk to the insurance industry. Again, we are not saying there might not be alternative explanations for insurers’ behaviour other than maintaining or increasing risks. It is totally possible that the (unfounded in advance, and unmaterialized in hindsight) fear from death spiral motivated insurers’ resistance, yet we believe our framework should not be overlooked as it provides at least as good as explanation for their behavior.

Policymakers and lawmakers must be aware of insurers’ interests when considering regulation or implementation of future technological advances, to ensure that new legislation or regulations surrounding technological developments comport with society’s interest in optimal risk levels. This awareness is critical because technology will continue to develop and present novel ways to reduce risk. Properly assessing insurers’ arguments against these advances will further society’s and insureds’ interest in producing a safer world.

In sum, examination of insurers’ practices in fueling third-party moral hazard and objecting to risk-reducing technological progress, seems to indicate that insurers have a stake in maintaining or increasing risk levels in society. Moreover, what is worrisome is not merely the prospect of an actor interested in increasing risk, but also the fact that this interest is diametrically opposed to the insureds and society’s interest in optimally reducing risk and overall harm. Thus, considering this far-reaching impact, it is essential that policymakers incorporate insurers’ potential ulterior interest in risk-increasing when assessing future regulations, laws, or other policies, particularly when those decisions involve legislation that may increase risks, impact technological progress, or manifest in third-party moral hazard.

We now turn to discuss a final category of insurer practices that policymakers should be especially aware of. This category harbors practices that combine the demerits described in the last two chapters; that is, practices that are motivated by both shifting losses and increasing total risk.