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An Institutional Analysis of Insurance Regulation - The Case of Sweden

Hägg, P Göran T LU (1998) In Lund Economic Studies 75.
Abstract
The thesis is a broad attempt to analyse economic forces behind, and economic rationales for, institutions that constrain the organisation and operation of insurance companies. The basic task is threefold: (i) to develop institutional theory by providing an outline of a transaction cost explanation of the origin of, and the rationale for, institutions that constrain the organisation and the operation of insurance organisations; (ii) to apply our institutional theory and explain recorded institutional structures in order to make them intelligible with respect to the contractual context in which they have been nested; and (iii) to appraise the explanatory power of our institutional theory with respect to conventional economic theories on the... (More)
The thesis is a broad attempt to analyse economic forces behind, and economic rationales for, institutions that constrain the organisation and operation of insurance companies. The basic task is threefold: (i) to develop institutional theory by providing an outline of a transaction cost explanation of the origin of, and the rationale for, institutions that constrain the organisation and the operation of insurance organisations; (ii) to apply our institutional theory and explain recorded institutional structures in order to make them intelligible with respect to the contractual context in which they have been nested; and (iii) to appraise the explanatory power of our institutional theory with respect to conventional economic theories on the economics of public regulation.



In the first part, we analyse the decision dilemma of consumers of whether to place trust in an insurer. The analytical tool has been a one-sided, dynamic Prisoner's Dilemma Game. One basic result is that there are contractual settings where spontaneous market mechanisms may fail to bring about an efficient level of transaction because of credibility problems of an industry. We have formally analysed the prime move dilemma and informally discussed incidents of misguided trust. The prime move dilemma refers to a situation where consumers, because of incomplete information, are unable to rank the quality of insurers and refrain from exchange because of a too low level of trust. The prime move problem may prevent the market from evolving. Misguided trust of consumers refers to the situation where consumers are unable to rank the quality of individual insurers but still find the category of companies trustworthy, Misguided trust is a contractual problem for an industry if incidents of failed performance by a few companies negatively affect consumers' average expectation about the trustworthiness of the entire industry. The market for insurance may, then, contract. The analysis creates a basis for novel hypotheses about the origin of insurance regulation. In the case of a prime move dilemma, public regulation may be requested by an industry because distrust prevents mutually beneficial exchange on risks. In the case of misguided trust, public regulation may be requested because the conduct of low quality comapnies damages the joint credibility of the industry.



In the second part, we outline the evolution of recorded Swedish institutions of insurance starting in the late Middle Ages and ending in the early 20th century. We argue that our institutional analysis explains recorded developments to a high degree, as well as the core structure of today's regulatory system of insurance. Common rationales with the design of insurance institutions have been to invoke trust, protect relations involving trust, economise on transaction costs and promote further exchange on risks. Then, we contrast our institutional analysis with conventional economic theory - the public interest- and the special interest theory. We argue that the examined history lends strong support to our institutional theory, support to the special interest theory, and insignificante support to the special interest theory. (Less)
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author
opponent
  • Assistant Professor Bjuggren, Per-Olof, Jönköping International Buisness School
organization
publishing date
type
Thesis
publication status
published
subject
keywords
Misguided Trust, Prime Move Problem, Trust-sensitive Contracts, The Economics of Trust, The Special Interest Theory, The Public Interest Theory, Transaction Costs, Institutional Theory, Insurance Regulation, Institutions, Reputation, Quality., Actuarial science, Försäkring (ej försäkringsrätt S137)
in
Lund Economic Studies
volume
75
pages
295 pages
publisher
Department of Economics, Lund Universtiy
defense location
Holger Crafoords Ekonomicentrum, EC III, Room 210.
defense date
1998-06-03 10:00
external identifiers
  • other:ISSN 0460-0029
ISSN
0460-0029
language
English
LU publication?
yes
id
9541842a-f88c-485b-b39f-8b94350bb449 (old id 18839)
date added to LUP
2007-05-24 15:49:32
date last changed
2016-09-19 08:44:56
@phdthesis{9541842a-f88c-485b-b39f-8b94350bb449,
  abstract     = {The thesis is a broad attempt to analyse economic forces behind, and economic rationales for, institutions that constrain the organisation and operation of insurance companies. The basic task is threefold: (i) to develop institutional theory by providing an outline of a transaction cost explanation of the origin of, and the rationale for, institutions that constrain the organisation and the operation of insurance organisations; (ii) to apply our institutional theory and explain recorded institutional structures in order to make them intelligible with respect to the contractual context in which they have been nested; and (iii) to appraise the explanatory power of our institutional theory with respect to conventional economic theories on the economics of public regulation.<br/><br>
<br/><br>
In the first part, we analyse the decision dilemma of consumers of whether to place trust in an insurer. The analytical tool has been a one-sided, dynamic Prisoner's Dilemma Game. One basic result is that there are contractual settings where spontaneous market mechanisms may fail to bring about an efficient level of transaction because of credibility problems of an industry. We have formally analysed the prime move dilemma and informally discussed incidents of misguided trust. The prime move dilemma refers to a situation where consumers, because of incomplete information, are unable to rank the quality of insurers and refrain from exchange because of a too low level of trust. The prime move problem may prevent the market from evolving. Misguided trust of consumers refers to the situation where consumers are unable to rank the quality of individual insurers but still find the category of companies trustworthy, Misguided trust is a contractual problem for an industry if incidents of failed performance by a few companies negatively affect consumers' average expectation about the trustworthiness of the entire industry. The market for insurance may, then, contract. The analysis creates a basis for novel hypotheses about the origin of insurance regulation. In the case of a prime move dilemma, public regulation may be requested by an industry because distrust prevents mutually beneficial exchange on risks. In the case of misguided trust, public regulation may be requested because the conduct of low quality comapnies damages the joint credibility of the industry.<br/><br>
<br/><br>
In the second part, we outline the evolution of recorded Swedish institutions of insurance starting in the late Middle Ages and ending in the early 20th century. We argue that our institutional analysis explains recorded developments to a high degree, as well as the core structure of today's regulatory system of insurance. Common rationales with the design of insurance institutions have been to invoke trust, protect relations involving trust, economise on transaction costs and promote further exchange on risks. Then, we contrast our institutional analysis with conventional economic theory - the public interest- and the special interest theory. We argue that the examined history lends strong support to our institutional theory, support to the special interest theory, and insignificante support to the special interest theory.},
  author       = {Hägg, P Göran T},
  issn         = {0460-0029},
  keyword      = {Misguided Trust,Prime Move Problem,Trust-sensitive Contracts,The Economics of Trust,The Special Interest Theory,The Public Interest Theory,Transaction Costs,Institutional Theory,Insurance Regulation,Institutions,Reputation,Quality.,Actuarial science,Försäkring (ej försäkringsrätt S137)},
  language     = {eng},
  pages        = {295},
  publisher    = {Department of Economics, Lund Universtiy},
  school       = {Lund University},
  series       = {Lund Economic Studies},
  title        = {An Institutional Analysis of Insurance Regulation - The Case of Sweden},
  volume       = {75},
  year         = {1998},
}