Uncertainty > Risk: Lessons for Legal Thought from the Insurance Runoff Market

Abstract

Insurance ideas inform legal thought: from tort law, to health law, to theories of distributive justice. Within legal thought, insurance is often conceived as an ideal type in which insurers distribute determinable risks through contracts that fix the parties’ obligations in advance. This ideal type has normative appeal, among other reasons because it explains how tort law might achieve in practice the objectives of tort theory. Significantly for tort theory, this ideal type supports a restrictive vision of liability-based regulation, on the grounds that uncertainty poses an existential threat to insurance markets. Prior work has criticized this restrictive vision on normative grounds. This article criticizes that vision on empirical grounds. The article describes an emerging secondary insurance market – the insurance runoff market – that transfers liabilities under insurance policies issued many years in the past. Having started with old asbestos and hazardous waste liabilities, the market now extends to other liabilities that have not worked out well for the companies that insured them, including workers compensation, savings-linked life insurance, pension and annuity guarantees, and long term care insurance. Runoff specialists reprice these legacy insurance liabilities with hindsight, consolidate them, and take calculated risks that encourage capital to enter the runoff market. That market transforms the uncertainties of the past into today’s tradeable risks, bringing into the open a dynamic that pervades insurance markets: namely, the promises that are made in all insurance policies get bundled and reconceptualized into sets of liabilities that are valued and revalued, further combined and redefined over time. Through the lens of the runoff market we can see many ways that insurance organizations manage uncertainty, revealing the resilience in insurance markets and the flexibility and innovation that produce that resilience. The runoff market counsels us to give much less weight to arguments that expanding liability will undermine insurance markets. Insurance already involves so much uncertainty, and insurers have so many ways to manage it, that the most likely result will always be that they will continue to muddle through.