MANDATORY INSURANCE: TRANSACTION COSTS ANALYSIS OF INSURANCE

Abstract

The pooling-of-risks theory of insurance has proven to be most useful and is widely applied in law and economics. Nevertheless, the theory has important limitations. This article reviews the established approach to insurance and

liability. However, the focus is on the law and economics aspects of property and liability insurance, which the standard risk-aversion theory fails to explain. An institutional theory of financial intermediation clarifies the services supplied

by the insurance firm. Besides risk-aversion, transaction costs in trade explain a demand for insurance. Mandatory requirements and insurance as a private alternative to public justice are other reasons for an insurance demand.

Keywords: Mandatory, Insurance, Transaction Cost Theory, Guarantee