November 2012 Vol. 111 No. 2 THE REVIEW

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 creating 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 absolute 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 regulatory role of insurance in additional, yet unutilized, areas: (1) consumer protection, (2) food safety, and (3) financial statements.

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