Book Review Risky Business: Insurance Markets and Regulation, edited by Lawrence S. Powell, 2013, Oakland, CA: The Independent Institute, 311 pp. ISBN: 978‐1‐59813‐116‐1.

• Published date: 01 December 2015
• Date: 01 December 2015
• DOI: http://doi.org/10.1111/jori.12109

BOOK REVIEW

Risky Business: Insurance Markets and Regulation, edited by Lawrence S. Powell, 2013,

Oakland, CA: The Independent Institute, 311 pp. ISBN: 978-1-59813-116-1.

Reviewer: William L. Ferguson, The University of Louisiana at Lafayette;

ferguson@louisiana.edu

Risky Business: Insurance Markets and Regulation is a collection of nine academic essays

that explore aspects of the current state-based system of insurance regulation

intended for use by both policymakers and consumers. The first essay, by Arnold

Kling, provides a broad discussion of the basic economics and politics inherent to the

insurance mechanism, helping to establish its role and fundamental importance to

modern society regarding the transfer, pooling, and subdivision of losses under

conditions of risk aversion and moral hazard. Using actual and hypothetical

examples from different lines of business, Kling also discusses the need for regulation

of the insurance mechanism, as well as several anomalies that stem from various

behavioral and socioeconomic factors, including governmental provision of

insurance.

The second essay, by Martin Grace, provides a collection of cautionary case studies

examining various causes and effects of recent insurance regulatory failures in several

different states and different lines of business. Grace provides a detailed discussion,

with timelines, for each failure: in the homeowners insurance market in Florida, the

workers compensation market in Maine, and the auto insurance markets in

Massachusetts, New Jersey, and South Carolina. All follow a common thread/

pattern: some initial price shock or other insurance market disruption that makes that

issue politically salient, the rapid development of consumer (voter) and/or other

political coalitions intent on combating the issue, hyper-politicization of the issue

allowing legislators/regulators/politicians to self-insert themselves into the debate,

typically followed by an inappropriate short-run fix (e.g., increased price regulation),

with inevitable long-run unintended consequences (e.g., the free market responds

through reduction of supply or availability that further exacerbate the original issue).

The third essay, by Powell himself, investigates the effects of credit-based insurance

scoring on insurance markets. Powell provides a review of the predictive accuracy of

insurance scores since first appearing in the academic literature in 1949, including an

examination of the methods and results of several major investigations since (e.g., by

the Texas Department of Insurance, EPIC Actuaries, and the Federal Trade

© 2015 The Journal of Risk and Insurance. Vol. 82, No. 4, 985–988 (2015).

DOI: 10.1111/jori.12109

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