Donatella Porrini

Class Action and Financial Markets: Insights from Law and Economics

According to the law and economics approach, pure economic loss is a private loss that is not socially relevant but simply implies a redistribution of wealth. Consequently, wrongful behavior that induces reallocation of costs and benefits with no consequences on social welfare is not considered socially harmful, so is not necessarily subject to compensation. Since pure economic loss is very often financial, the above reasoning also applies to financial markets. However, the same law and economics arguments suggest that in financial markets, the policy of internalizing pure economic loss by means of class actions can be more far-sighted than simply compensating the victims: the liability system has the particular feature of producing deterrence and driving the market towards an efficient outcome. In this vein, the paper argues that class action intended as a complementary ex-post regulatory device can play a significant role in addressing a failure that ex-ante regulation has not. This is coherent with the law and economics tradition that interprets tort law remedies as a solution for internalizing externality and providing the correct incentive to the markets.

Regulating Big Data effects in the European insurance market

The article analyzes the regulatory framework in the insurance market in connection with the advent of Big Data, such as information collected from different sources that can be manipulated by new technologies. The use of Big Data offers significant opportunities to the insurance companies in terms of digitization of the distribution channels and greater knowledge of the customers, which is instrumental to a more effective identification of the individual’s risk profile, as well as improvement of the competitiveness. However, regulatory measures are needed for a proper use of Big Data in terms of respect of the individual privacy, potential discrimination and constraint on competition.

Competition in Banking: Switching Costs and the Limits of Antitrust Enforcement

The antitrust intervention in banking has always been heavily influenced by considerations of stability. Regulation has historically given precedence to the stability objective, relegating thus competition to second place. In fact, in the case of banking, price competition tends to encourage overly speculative behaviours, which essentially entail acceptance of excessive risk, with a resultant volatility that could potentially harm depositors, and ultimately compromise the stability of the economic system as a whole. The consequence of this approach is that banking market becomes extremely rigid on the supply side and structurally not equipped for a competitive orientation, and banks come to occupy a privileged position vis-a-vis governments that--to a greater or lesser extent, depending on the countries and the situations--enables them to sidestep the antitrust authorities. In such a scenario, the trade-off between stability and competition cannot be totally resolved through traditional antitrust actions, which are sometimes at odds with the stability objective and hampered by the constraints of the previously defined regulatory framework. It is precisely these considerations, found in a significant portion of the literature, that provide the starting base for the hypothesis of this work and namely the proposal of a novel demand side perspective, i.e. one which focuses on the central role of consumers in the competitive process. If intervention on the supply side is hampered a priori by the regulatory framework, it is nevertheless possible to implement pro-competition actions on the demand side, for example by enhancing the ability of consumers to change from one provider to the other without impacting on the market structure. In operational terms, the proposed approach is to leverage consumer mobility in order to stimulate the currently weakened competition between firms. This would make it possible to pursue the traditional antitrust objectives of efficiency and welfare maximisation, without necessarily impacting on stability.

Defining Insurance Models within Climate Change European Policies

The paper outlines the role of insurance as a political economic tool that can be used to face the issue of climate change. The magnitude of potential loss, the adverse social and economic consequences for millions of people and considerable fiscal strain imposed on the government budget by weather disasters indicate that governments can benefit significantly from the use of insurance instrument that would seamlessly not only cover damage but also incentivate risk reduction behaviours. Looking at the diversity of existing insurance systems in European countries, natural hazards insurance is examined in terms of private and public involvement, taking into account the EU climate change policies framework. The paper analyses the economic efficiency of different insurance models in relation to the informational imperfections, i.e. adverse selection, moral hazard, and market imperfection, i.e. charity hazard and transaction costs. Moreover, the different models are considered for the way they likely affect incentives to address climate change seeking mechanism to facilitate the mitigation of greenhouse gas emissions, the adaptation to the inevitable impacts of climate change, and the development of climate risk financial management. Conclusive remarks are presented about the possible future development of an European insurance system to find an economic efficient response to natural hazards caused by climate change.

Adverse Selection, Statistical Discrimination and Antitrust Law: the Case of Italian Automobile Optional Insurance

Risk classification is common practise in the insurance market: on one hand, it can help to refine the premium schemes and improve the economic situation of the insurance companies; on the other hand, it is a traditional remedy for situations of adverse selection, as the economic theory has demonstrated. But the application of classification could be seen as altering competition in the marketplace when the statistical discrimination implies the adoption of the same price policies by many firms in the market. The paper tries to verify this affirmation in relation with the Italian market of the optional insurance against car thefts: in this liberalised market the insurance companies had applied risk classifications, but in 1994 the antitrust authority identified a cartel with reference to the exchange of statistical data to define a common statistical discrimination between the main insurance companies. In the final part of the paper, a model estimated using data about Italian insurance companies confirms the presence of adverse selection problems. This result could support the defence of the insurance companies based on the use of statistical discrimination as a remedy against informational problems. But, giving the same result also for the years after the antitrust authority sentence and the prohibition to the application of statistical discrimination, the result of the model could also be seen as a demonstration of the fact that in this case statistical discrimination was not a good tool against adverse selection problem.