Let us simply describe these as ex post insurable.4 If the parameters by which they could be deemed ex post
insurable could be pre-specified, then there is nothing to prevent the parties from conditioning the insurance
on these parameters. For example, suppose that the only thing that separated an ex post insurable from
an ex post uninsurable event, was diversification. An ex post insurable event might be one that hit only
one policyholder but an event impacting many policyholders would be ex post uninsurable. If things were
this simple, a contract could be written conditioning coverage on the insurer’s surplus (rather like a mutual
contract). But the circumstances that determine whether an event is ex post insurable may not be that easy
to pre-specify or that easy to anticipate. For example, consider toxic mold, which burst onto the insurance
scene as an unanticipated loss recently. Not only can it be an undiversifiable loss but, going forward, its
coverage carries significant moral hazard. The fear is that insurance may be seen as a substitute for proper
repair and maintenance of property. It may not be practical to write into contracts enforceable exclusions
based, not only on the peril which is unanticipated, but on the moral hazard it might engender. Table 1
illustrates the criteria often listed in insurance textbooks for insurability (the loss is anticipated, measurable,
etc.) and suggests how such factors might determine whether an unanticipated loss is ex post insurable.
Thus we suggest that a surprise event may be insurable going forward if it is measurable (ex post), there is
low correlation, low moral hazard, and information is symmetrically distributed between the parties.
|
Classification of Losses |
Ex ante insurable |
Ex post insurable |
Ex post uninsurable |
|
Anticipated |
Yes |
No |
No |
|
Measurable |
Yes |
No |
No |
|
Observable |
Yes |
Yes |
No |
|
Low correlation |
Yes |
Yes |
No |
|
Low moral hazard |
Yes |
Yes |
No |
|
Symmetric information |
Yes |
Yes |
No |
Table 1
4 Berliner (1982) defines insurable losses as satisfying the following criteria. Losses are anticipated, measurable and, after
the fact observable. There must be low correlation and little moral hazard or adverse selection. Losses that are not anticipated
but satisfy the other conditions are considered ex post insurable.