This chapter develops more concrete examples and strategies that the insurance industry and the public sector can use to deal with the problems raised by anomalies on the demand and supply sides, based on the principles formulated in the previous chapter. The first section focuses on strategies for dealing with the demand side. These strategies involve providing information, reframing choices, changing incentives, and assuring coverage in various ways to improve individual and social welfare. We then turn to anomalies on the supply side by examining ways that risk information could and should affect insurers as they determine what premiums to charge, the types of coverage to provide, and the role that the public sector can play in making insurance more widely available. The chapter concludes with suggestions for future research on ways to more effectively utilize insurance as a cornerstone for creating risk management strategies for individuals, firms, and society.
PUBLIC POLICY TO DEAL WITH DEMAND-SIDE ANOMALIES
The least controversial argument for trying to correct apparent anomalies on the demand side exists when they result from errors that buyers of insurance make due to incomplete or biased information, or when they use overly simplified models of choice. Government’s role here is not to change preferences, but to take steps that bring behaviors more in line with the hypothetical choices of a fully informed decision maker with a correct understanding of the relationships between risk and premiums. The strategy is designed to foster an efficient private market for insurance, not impede it.