Rutgers School of Law, Camden, and the Rutgers Center for Risk and Responsibility present the Conference on Fragmented Risk on March 1, 2013. The conference on Fragmented Risk will engage academics, industry professionals, lawyers, and regulators in discussion of the issues related to bundling and fragmenting risk in insurance policies and the insurance industry.
Proposal deadline: November 19, 2012
Contact: Professor Jay Feinman, feinman[@]camden.rutgers.edu im
Insurance policies embody a tension between bundling risk and fragmenting risk. Often policies bundle related risks: A homeowners policy covers many risks of loss or liability related to owning a home, a CGL policy covers many of the business activities that may result in liability, and a health insurance policy contains broad coverage, especially following the Affordable Care Act. To the extent that there are limitations or exclusions, they generally involve large, relatively obvious categories of loss, such as expected or intended losses in the ordinary course of business.
Policyholders benefit from bundling risk because coverage is easier to purchase and more predictable, in that there are fewer gaps in coverage and those gaps that remain are more easily understood. Insurers benefit because they insure a large number of policyholders with similar risk profiles so they benefit from the law of large numbers.
Sometimes, perhaps increasingly, however, insurance policies fragment risk through exclusions, narrow definitions, and other limitations. Fragmenting allows insurers to exclude coverage for correlated risks where potential losses are high and to reduce premium costs to respond to market conditions. Fragmenting also reduces potential liability for new and unanticipated risks, especially due to technological change or expansive judicial interpretation of policy language; what began with questions about coverage for pollution and asbestos has now spread to mold, Chinese drywall, and even climate change.
Fragmented risk presents at least three types of problems. First, policyholders are likely to be less knowledgeable about coverage under fragmented risks, which reduces the efficiency of the market for insurance. Second, fragmenting produces gaps in coverage. Some policyholders can account for these gaps through riders or other coverage, conscious retention of risk, or other risk management techniques. Often, however, policyholders will not plan for the gaps, leaving the losses on them, on their victims in the case of liability policies, or on the public at large if government absorbs part of the loss, either through direct aid or through residual market schemes that are not actuarially sound. Third, fragmented policies may generate more disputes about coverage that must be resolved by regulators and courts, creating the potential for uncertainty among insurers and insureds.
The conference on Fragmented Risk will engage academics, industry professionals, lawyers, and regulators in discussion of these issues.