Auto insurance costs soar across the world (Subject Review)

Abstract

Over-insurance and public insurance provision are covered in this chapter. When imperfect information is present, the competitive outcome in insurance markets may not only be suboptimal relative to the impossible optimum that would have occurred if information were perfect, but also suboptimal compared to achievable optimum. In theory, the government could provide the best insurance or at the very least outperform the imperfectly informed market if it had or could receive perfect information about the world's situation at the time of purchase. The chapter describes a situation in which the insurance buyer has power over present-day decisions that will influence a future state of nature, but the insurer is unable to actively monitor the insured's behavior. The goal of insurance is to shield those who are afraid of taking risks from having to deal with all of the negative effects of nature's acts. In various environments, people may pay varying costs and have varying earnings. When money is spent, perfect insurance maintains marginal cost pricing by transferring revenue across natural states. Transfers of income are based more on what is observed than on the state of nature when the states of nature are imperfectly measured. As an alternative, rates might be changed to include insurance.