Rethinking Insurance Markets with an Institutional Economics Lens in a Digital Age

The advent of the internet and a proliferation of data create new challenges and opportunities for insurance. Consumers need protection against invasions of privacy, and unfair discrimination by algorithmic underwriting decisions. The additional data provides opportunities to make products and prices more transparent, and provide advice on savings, investment and consumption. Some developments, such as comparison sites, do not seem be to have contributed much to a more efficient market.
This paper approaches these issues using the insights of the “New Institutional Economics”, represented by the Economic “Nobel” prize winners, Ronald Coase, Douglass North, Elinor Ostrom and Oliver Williamson. They have explored the fact that all collaborative institutions, of which “free markets” are one type, operate under “rules of the game”. These rules can vary from implicit to detailed regulation, and determine the extent to which the markets serve the needs of participants. They do not develop spontaneously – and can as often be determined by the actions of market participants as by governments.
The insights are used to analyse market structures with the four P’s of marketing theory: product, price, place and promotion. Markets are defined by the products sold and the place or places in which transactions take place. Their efficiency depends on the price being determined by the free and fair interaction of willing buyers and willing sellers. The method of promotion can have a significant impact on transparency and costs for both sides.
Insurance markets have developed their own particular “rules of the game” over four thousand years. These include the concepts of average, insurable interest and utmost good faith – all of which contribute to transparency and the fairness of pricing. In recent centuries, prudential regulation was added – again to ensure that consumers were not unfairly treated, while the last few decades have seen legislation against unfair discrimination in pricing. Insurance products and services do not however enjoy much in the way of protection of intellectual property. Throughout the period of development, the rules have been as much supranational as local. Suggestions are made as to how actuaries can contribute to new rules of the game.
 
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