Insurance ideas inform legal thought: from tort law, to health law and financial services regulation, to theories of distributive justice. Within that thought, insurance is 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, among other reasons because it explains how tort law might achieve in practice the objectives of tort theory. This ideal type also supports a restrictive vision of liability-based regulation that opposes expansions and supports cutbacks, on the grounds that uncertainty poses an existential threat to insurance markets.
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. Starting with legacy asbestos and hazardous waste liabilities, the runoff market now extends to other insurance contracts that have not worked out well for the insurers that issued them, including workers compensation, savings-linked life insurance, pension and annuity guarantees, and long term care insurance.
Runoff specialists reprice these legacy liabilities with hindsight, consolidate them and develop relevant expertise, and take calculated risks that encourage capital to enter the runoff market. That market transforms the uncertainties of the past into today’s tradeable risks, bringing into the open a dynamic that pervades all insurance markets. 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 teaches that we should give much less weight to arguments that liability reform 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
Baker, Tom, "Uncertainty > Risk: Lessons for Legal Thought from the Insurance Runoff Market" (2021). Faculty Scholarship at Penn Law. 2141.