¹Professor of Economics at the University of Edinburgh and Director of The David Hume Institute

^*This research was prompted by discussions at the 15th Annual European Law and Economics Conference in Utrecht, September 1998. A special thank you is due to the many insurance/risk managers in companies across the U.K. who gave generously of their time to complete the questionnaire on which this paper is based.

Abstract

The paper discusses the corporate demand for insurance by offering a brief review of the theoretical work in the area and by presenting the results of a survey of large U.K. companies with regard to their insurance purchase decision. It is argued that the usual pooling-of-risks motivation for insurance purchases can usefully be superseded by a transaction-costs theory where insurance offers a low-cost alternative to expensive contingent contracting among the stakeholders of the firm. There remain substantial uncertainties over how wide or encompassing the notion of transaction cost is in this context, and there is some evidence that institutional and regulatory considerations also play a part in the company's insurance purchase decision.