The Economics of Insurance

The Marginal Revolution Podcast

In this episode, Alex and Tyler dive deep into the fascinating and often misunderstood world of insurance, exploring how this trillion-dollar industry underpins modern economies while shaping human behavior in surprising ways. From its ancient roots in maritime adventures to the revolutionary development of life insurance, they unravel the economic logic and social norms that made this market possible. Along the way, they grapple with enduring puzzles: Why do people insure against some risks but not others? Why did life insurance once seem repugnant, only to become a moral imperative? How has the industry's ability to manage moral hazard and agency problems evolved—or not? From mutual aid in Indian villages to the legacy of 17th-century tontines, the conversation illuminates the ways in which insurance reflects both the limits of human foresight and our relentless attempts to navigate an uncertain world.

Recorded March 14, 2024

Transcript and links: https://www.mercatus.org/marginal-revolution-podcast/economics-insurance

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See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/

Chapters

• 00:00 - The size and benefits of the insurance industry
• 02:35 - Insurance as a transaction enabler
• 10:13 - Nicholas Barbon, Robin Hanson, and insurance bundling
• 18:22 - The effect of advances in mathematics on insurance
• 23:45 -Tradable insurance as an early prediction market
• 32:54 - Risks we don't insure against
• 37:12 - Charles Ives and changing social attitudes around life insurance
• 41:33 - Will repugnance fade for paid organ donations as it did for life insurance?
• 45:31 - Have the agency problems behind insurance been fully solved?
• 54:44 Good books on insurance and takeaways