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111 Mich. L. Rev. 197 (2012-2013)
Outsourcing Regulation: How Insurance Reduces Moral Hazard

handle is hein.journals/mlr111 and id is 217 raw text is: OUTSOURCING REGULATION: HOW INSURANCE REDUCES MORAL HAZARD Omri Ben-Shahar* Kyle D. Logue** This Article explores the potential value of insurance as a substitute for government regulation of safety. Successful regulation of behavior requires information in setting standards, licensing conduct, verifying outcomes, and assessing remedies. In various areas, the private insurance sector has technological advantages in collecting and administering the information relevant to setting standards and could outperform the government in cre- ating incentives for optimal behavior. We explore several areas that are regulated more by private insurance than by government. In those areas, the role of the law diminishes to the administration of simple rules of abso- lute liability or no liability, and affected parties turn to insurers for both risk coverage and safety instructions. This Article examines the methods used in regulation-through-insurance, and then explores the potential regu- latory role of insurance in additional, yet unutilized, areas: (1) consumer protection, (2) food safety, and (3)financial statements. TABLE OF CONTENTS INTRODUCTION ...................................................................................... 198 I. REGULATORY TECHNIQUES IN INSURANCE .............................. 203 A. Ex Ante Regulation............................................................ 205 1. Underwriting Risk: Differentiated Premiums............. 205 2. Deductibles and Copayments...................................... 208 3. R efusal to Insure.........................................................209 4. Coaching Safer Conduct .............................................210 5. Implementing Private Safety Codes............................211 6. Research and Development of Safety Methods ..........212 7. Influencing Government Regulation........................... 213 B. Ex Post Regulation ............................................................ 213 1. Claims Management ................................................... 213 2. M itigation of Loss.......................................................214 3. E xclusions...................................................................2 15 4. Ex Post Underwriting ................................................. 215 * Frank and Bernice J. Greenberg Professor of Law, University of Chicago. ** Wade H. and Dores M. McCree Collegiate Professor of Law, University of Michi- gan. Helpful comments were provided by Kenneth S. Abraham, Ronen Avraham, Saul Levmore, Daniel Schwarcz, and workshop participants at the University of Chicago and George Washington University. The authors are especially grateful to Kim Brunner and other insurance industry experts at the State Farm Insurance Company for opening their research facilities to us and answering our questions. 197