Insurance by Government or Against Government? Overview of Public Risk Management Policies

Abstract

In what contexts is it desirable that the government, rather than the private sector, takes on the role of an insurer and helps people reduce risks? Our discussion implies that while in a number of areas individuals benefit from well‐designed insurance provided by their government, ill‐designed public policies (for example existing pay‐as‐you‐go pension systems) force individuals to insure against their government. It is further discussed how governments could improve their risk managing role in many areas by using income contingent loans, provided the country has high‐quality institutions and governance. Such loans to artists, sportspeople, flood victims or collapsing financial institutions would replace the existing nonrepayable transfers, grants, subsidies and bailouts. Using a simple efficiency‐equity‐sustainability framework for comparing income contingent schemes with conventional public and private insurance policies, we document that this would enable governments to extend their insurance assistance to a greater number of people and institutions – in a way that is not only equitable but also efficient and fiscally sustainable.