Question

Governments sometimes intervene in insurance markets. Explain in detail two reasons why they might intervene and outline the rationale and justification for doing so. (20 marks, approximately 300 words please).

Answer 1

Insurance market is the market where there is sell and purchase of different types of insurance policies. The sell and purchase of these policies in these markets is like other goods and services market. But in this market there is information assymetry which leads to market failure. So in order to prevent market failure or decrease its effect government intervention in this market.

The two main reasons for government intervention may be -

1. To ensure provision of insurance to right person in need - One of the main problems of the insurance market is that the insurance providers provide insurance to those with low risk, but the one with high risk is in more need of this insurance, so this leads to misallocatio of insurance. So in order to ensure the right or optimal allocation of insurance plans government intervene in the market and passes the laws to provide insurance to such people who are in actual need of it like industrial workers who faces dangers everyday working on complex machines etc.
2. To regulate premium amounts - The other reason for the government intervention may be, that the insurance providers charge a high premium to the person insured as compared to the actual benefit of the insurance. So in order to decide the fair amount of premium government intervenes in the insurance market.

The justification for the government intervention in the insurance market is that it is the duty of the government to protect the rights and act for the well being of its citizens. So if in any market there is a chance that the consumers may be cheated by the firms or entrepreneurs or by any sellers of goods and services, it is rationale for the government to intervene in that market.