The Missing Monitor in Corporate Governance: The Directors\u27 & Officers\u27 Liability Insurer

This article reports the results of empirical research on the monitoring role of directors\u27 and officers\u27 liability insurance (D&O insurance) companies in American corporate governance. Economic theory provides three reasons to expect D&O insurers to serve as corporate governance monitors: first, monitoring provides insurers with a way to manage moral hazard; second, monitoring provides benefits to shareholders who might not otherwise need the risk distribution that D&O insurance provides; and third, the bonding provided by risk distribution gives insurers a comparative advantage in monitoring. Nevertheless, we find that D&O insurers neither monitor corporate governance during the life of the insurance contract nor manage litigation defense costs once claims arise. Our findings raise significant questions about the value of D&O insurance for shareholders as well as the deterrent effect of corporate and securities liability. After exploring various explanations for these findings, we conclude that the absence of monitoring is due, at least in part, to the agency problem in the corporate context. Our analysis thus suggests that the existing form of corporate D&O insurance both results from and contributes to the relatively weak constraints on corporate managers. Corporate managers buy D&O coverage for self-serving reasons, and the coverage itself because it does not control moral hazard, reduces the extent to which shareholder litigation aligns managers\u27and shareholders\u27 incentives

The Missing Monitor in Corporate Governance: The Directors\u27 & Officers\u27 Liability Insurer

This article reports the results of empirical research on the monitoring role of directors\u27 and officers\u27 liability insurance (D&O insurance) companies in American corporate governance. Economic theory provides three reasons to expect D&O insurers to serve as corporate governance monitors: first, monitoring provides insurers with a way to manage moral hazard; second, monitoring provides benefits to shareholders who might not otherwise need the risk distribution that D&O insurance provides; and third, the bonding provided by risk distribution gives insurers a comparative advantage in monitoring. Nevertheless, we find that D&O insurers neither monitor corporate governance during the life of the insurance contract nor manage litigation defense costs once claims arise. Our findings raise significant questions about the value of D&O insurance for shareholders as well as the deterrent effect of corporate and securities liability. After exploring various explanations for these findings, we conclude that the absence of monitoring is due, at least in part, to the agency problem in the corporate context. Our analysis thus suggests that the existing form of corporate D&O insurance both results from and contributes to the relatively weak constraints on corporate managers. Corporate managers buy D&O coverage for self-serving reasons, and the coverage itself because it does not control moral hazard, reduces the extent to which shareholder litigation aligns managers\u27and shareholders\u27 incentives

Transparency through Insurance: Mandates Dominate Discretion

This chapter describes how liability insurance has contributed to the transparency of the civil justice system. The chapter makes three main points. First, much of what we know about the empirics of the civil justice system comes from access to liability insurance data and personnel. Second, as long as access to liability insurance data and personnel depends on the discretion of liability insurance organizations, this knowledge will be incomplete and, most likely, biased in favor of the public policy agenda of the organizations providing discretionary access to the data. Third, although mandatory disclosure of liability insurance data would improve transparency, a reasonably complete understanding of the empirics of the civil justice system also requires mandatory disclosure of the payments and defense expenditures that are not covered by alternative risk transfer arrangements

Health Insurance, Risk, and Responsibility after the Patient Protection and Affordable Care Act

This essay explores the new social contract of healthcare solidarity through private ownership, markets, choice, and individual responsibility embodied in the Patient Protection and Affordable Care Act. This essay first explains the four main health care risk distribution institutions affected by the Act – Medicare, Medicaid, the individual and small employer market, and the large group market – with an emphasis on how the Act changes those institutions and how they are financed. The essay then describes the “fair share” approach to health care financing embodied in the Act. This approach largely rejects the actuarial fairness vision of what constitutes a fair share while pointing toward a new responsibility to be as healthy as you can. This new responsibility reflects the influence of health economics and health ethics, and it is part of the embrace of risk first described in the insurance as governance literature. There are challenges to achieving the solidarity through individual responsibility envisioned in the Act – most significantly ”risk classification by design” and non-compliance with the mandates – but the Act contains regulatory tools that the states, the new Exchanges, and the Department of Health and Human Services can use to address these challenges

Liability Insurance as Tort Regulation: Six Ways that Liability Insurance Shapes Tort Law in Action

Leaving aside difficult to interpret doctrinal developments, such as the abrogation of traditional immunities, liability insurance has at least the following six impacts on tort law in action. First, for claims against all but the wealthiest individuals and organizations, liability insurance is a de facto element of tort liability. Second, liability insurance limits are a de facto cap on tort damages. Third, tort claims are shaped to match the available liability insurance, with the result that liability insurance policy exclusions become de facto limits on tort liability. Fourth, liability insurance makes lawsuits against ordinary individuals and small organizations into repeat player lawsuits on the defense side, making tort law in action less focused on the fault of individual defendants and more focused on managing aggregate costs. Fifth, liability insurance personnel transform complex tort rules into simple rules of thumb, also with the result that tort law in action is less concerned with the fault of individual defendants than tort law on the books. Sixth, negotiations over the boundaries of liability insurance coverage (which appears nowhere in tort law on the books) drive tort law in action

Summary: Regulating Robo Advice Across the Financial Services Industry

In general, a robo advisor can be defined as an automated service that ranks, or matches, consumers to financial products on a personalized basis, sometimes in addition to providing related services such as educating consumers and selling products to them. Often associated with web-based financial investment services, a robo advisor can also include consumer financial product intermediaries such as automated mortgage brokers and insurance exchanges, as well as lead generation services such as Zillow, NerdWallet, and Mint.com. Although investment-focused robo advisors have received the most scrutiny from regulators, the same promises and regulatory concerns raised by investment robo advisors apply to their insurance and banking counterparts. The benefit of defining robo advisors as a general category of tools that span different financial services sectors is that an inclusive approach will encourage more cross-sharing and collaborative thinking to tackle similar challenges and opportunities, including regulatory questions.https://repository.upenn.edu/pennwhartonppi_bschool/1005/thumbnail.jp

Containing the Promise of Insurance: Adverse Selection and Risk Classification

Insurance law, risk pools, adverse selectio

Uncertainty \u3e Risk: Lessons for Legal Thought from the Insurance Runoff Market

Insurance ideas inform legal thought: from tort law, to health law, to theories of distributive justice. Within legal thought, insurance is often conceived as an ideal type in which insurers distribute determinable risks through contracts that fix the parties’ obligations in advance. This ideal type has normative appeal because, among other reasons, it explains how tort law might achieve in practice the objectives of tort theory, such as deterrence and loss-spreading. Significantly for tort theory, this ideal type supports a restrictive vision of liability-based regulation because uncertainty poses an existential threat to insurance markets that are understood to require insurance to meet this ideal type. Prior work has criticized this restrictive vision on normative grounds. This Article criticizes that vision on empirical grounds. The Article describes an emerging secondary insurance market—the insurance runoff market—that transfers liabilities under insurance policies issued many years in the past. Having started with old asbestos and hazardous waste liabilities, the market now extends to other liabilities that have not worked out well for the companies that insured them, including workers compensation, savings-linked life insurance, pension and annuity guarantees, and long-term-care insurance. Runoff specialists reprice these legacy insurance liabilities with hindsight, consolidate them, and take calculated risks that encourage capital to enter the runoff market. That market transforms the uncertainties of yesterday into today’s tradable risks, bringing into the open a dynamic that pervades insurance markets: namely, the promises that are made in all insurance policies get bundled and reconceptualized into sets of liabilities that are valued and revalued, further combined, and redefined over time. Through the lens of the runoff market, we can see many ways that insurance organizations manage uncertainty, revealing the resilience in insurance markets and the flexibility and innovation that produce that resilience. The runoff market counsels us to give much less weight to arguments that expanding liability will undermine insurance markets. Insurance already involves so much uncertainty, and insurers have so many ways to manage it, that the most likely result will always be that they will continue to muddle through