Insurance, Risk and Resource Allocation

Abstract

Insurance is an item of considerable importance in the economies of advanced nations, yet it is fair to say that economic theorists have had little to say about it, and insurance theory has developed with virtually no reference to the basic economic concepts of utility and productivity. Insurance is not a material good; although it is usually classified as a service, its value to the buyer is clearly different in kind from the satisfaction of consumers’ desires for medical treatment or transportation. Indeed, unlike goods and services, transactions involving insurance are an exchange of money for money, not money for something which directly meets needs. The closest analog in ordinary economic theory to an insurance policy is a bond or note, an exchange of money now for money later. But an insurance is a more subtle kind of contract; it is an exchange of money now for money payable contingent on the occurrence of certain events.