Editors' Summary

Abstract

being treated for a life-threatening disease; where drivers could not insure against the costs of accidents, to themselves or third parties; where homeowners could not protect themselves against the financial costs of fires and windstorms; and where firms and professionals could not protect against the financial costs of liability for harm to third parties. Without the ability to transfer these types of financial risks to insurers, members of such a society would be much less willing to take risks in consumption and investment decisions that are critical to the dynamism of capitalist economies. And consequently, such a society would be far less productive than the one in which we now live. Yet as important as insurance is to the functioning of modern economies, it is probably the least well understood of all the financial services commonly sold in the marketplace today. Various events in recent years, however, have focused public attention on the insurance industry. Controversy surrounding the system of medical malpractice insurance has again surfaced, with insurance rates for certain specialties skyrocketing in some states and critics charging that the current approach compensates victims poorly, entails enormous overhead costs, and fails to discipline malpractitioners effectively. Recently, even homeowners’ insurance has raised public policy concerns as insurers attempt to limit their exposure to new types of litigation, such as that over toxic mold in homes, as well as to catastrophic