Risk Havens: Offshore Financial Centres, Insurance Cycles, the ‘Litigation Explosion’ and a Social Democratic Alternative
| Date | 01 December 2002 |
| DOI | 10.1177/096466390201100402 |
| Author | Anthony B. Van Fossen |
| Published date | 01 December 2002 |
| Subject Matter | Articles |
FINANCIAL CENTRES,
INSURANCE CYCLES, THE
‘LITIGATION EXPLOSION’ AND
A SOCIAL DEMOCRATIC
ALTERNATIVE
ANTHONY B. VAN FOSSEN
Griffith University, Australia
ABSTRACT
Risk havens in offshore financial centres play an increasingly important role in capit-
alist risk management. They gain strength from cycles in the insurance industry
(during hard markets) and from the mystified notion of a ‘litigation explosion’ that
is used to reduce the rights of injured plaintiffs, particularly in times when insurers
experience low income from investments. The captive insurance company (which has
become the most prominent in Bermuda) and the asset protection trust (pioneered in
the Cook Islands) have become important instruments through which the wealthy
increase their own security and reduce the compensation that they pay for misfor-
tunes that befall the general population. While risk havens promote laissez-faire, the
article concludes that democratic socialism provides the most equitable and efficient
solution to the problems of risk and insurance.
INTRODUCTION
THERE HASbeen little attention in the academic literature to how
insurance and risk managers operate in the real world. This has been
despite the general and growing power of insurance companies and
risk managers in the international political economy, the systemic tendency
of capitalism to increase risks, and the orientation of risk managers to
promote global liberalism (Strange, 1996: 122–34).
SOCIAL & LEGAL STUDIES 0964 6639 (200212) 11:4 Copyright © 2002
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Capitalism in the post-Bretton Woods period since 1968 has increasingly
emphasized high-risk ‘flexible accumulation’ (Harvey, 1989) through global
financial transactions. With this has come increasing concern about risk
management, which increasingly has been conceptualized in financial terms.
Out of these tendencies has arisen the growing importance of tax havens and
offshore financial centres (OFCs)1 – laissez-faire jurisdictions (often on
remote islands) where tax and regulation are minimized and where an
increasing proportion of the world’s risk is insured.
This article focuses on the role that tax havens and offshore financial
centres play in capitalist risk management. It examines how they gain
strength from cycles in insurance markets and from the mystified notion of
a ‘litigation explosion’ that is used to reduce the rights of injured plaintiffs,
particularly in times when insurers experience low income from investments.
It emphasizes how risk havens2 act in favour of capitalist and elite interests
against general welfare. Finally, it briefly outlines a social democratic alterna-
tive in risk management.
This article, then, sees class and risk as closely connected. In this way it
departs from the two most influential sociological perspectives on risk: one
delineating the ‘risk society’ and the other outlining types of ‘risk culture’.
It contends that little can be learned about risk havens if one assumes that
class analysis is no longer useful in understanding the development of the
new ‘risk society’ or that class and risk are qualitatively distinct. My article
sees risk havens as the outcomes of the uncertainties, failures and mystifica-
tions of privatized risk reduction strategies, and so it disagrees with the
implication of the ‘risk society’ perspective (Beck, 1992, 1999; Beck et al.,
1994; Giddens, 1998) that most people will increasingly find private
initiatives to be superior to state-centred responses in handling life’s risks.
There is also little prospect of understanding risk havens if one adopts the
classless conservative view of structural functionalists who have developed
the concept of the ‘risk culture’. This Durkheimian approach proposes that
people’s patterns of social life develop distinctive ways of viewing the world
called ‘cultural biases’. According to this ‘risk culture’ perspective, people
perceive risks to be high depending on the degree to which they are isolated
from trusted, meaningful, bounded and permanent social institutions.
Likewise, high social integration is supposed to generate the perception that
risks are low. Furthermore, the ‘risk culture’ view contends that people’s
apparently controllable risky, dangerous, unhealthy and disabling behaviours
are caused by their culturally embedded lifestyles. According to this perspec-
tive, when large segments of the general population feel that they are being
subjected to unusual hazards and that elites are not to be trusted, this percep-
tion comes from their own inadequately integrated and structured social
relationships and culture (Dake, 1991, 1992; Dake and Wildavsky, 1991;
Douglas, 1986, 1992, 1997; Douglas and Wildavsky, 1982; Rayner, 1990, 1992;
Wildavsky, 1988; Wildavsky and Dake, 1990).
This article develops a very different perspective: a ‘political economy of
risk’ that contrasts sharply with the ‘risk society’ and ‘risk culture’ views. It
VAN FOSSEN: RISK HAVENS
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emphasizes that the wealthy use risk havens to increase their own security
and to reduce the compensation that they pay for misfortunes that befall the
general population. This article considers how the cyclical processes of the
capitalist insurance system distribute risks and it emphasizes how risk distri-
bution and insurance are arenas of class conflict and mystification. Its
argument is topical: private insurance companies today are refusing to cover
a number of risks and they are insisting that people pay substantially higher
premiums for what policies they are willing to issue. The media are
constantly reporting that there is a public liability insurance crisis, that risk
is out of control and that this is due to a ‘litigation crisis’ whereby frivolous
plaintiffs, their greedy lawyers and incompetent courts are burdening
insurers with extravagant payouts for questionable personal injuries.
This article proposes that today’s private insurance crisis is the latest of
many crises that arise from regular cycles in capital markets. Elite groups are
again manipulating responses to the crisis for their own advantage. My
argument proceeds as follows. A pervasive sense of risk is created at regular
intervals and this arises out of recurrent cycles in the capitalist insurance
system. The principal source of this insurance crisis is a repetitive financial
process that periodically produces low investment incomes for insurers. At
these points insurance companies and other elite groups mystify these finan-
cial problems by creating recurring moral panics about a so-called ‘litigation
explosion’ to strip back the juridical citizenship rights of injured parties and
the general population.
These same elite groups have greater recourse to tax havens and OFCs to
protect their assets during each successive crisis in private insurance. The most
important of these offshore vehicles today is the offshore (particularly the
captive3) insurance company (being most prominent in Bermuda’s OFC since
the mid-1970s). More recently the asset protection trust (APT)4 (pioneered in
the Pacific offshore centre of the Cook Islands in 1989) has become a reposi-
tory of hundreds of billions of dollars. The article examines how offshore
insurance companies and APTs are designed to shield elite groups from risk.
Finally, the article proposes a social democratic answer as the most equitable
and efficient solution to the problems of risk and insurance.
INSURANCE CYCLES
Property and liability insurance markets alternate between hard and soft
markets in a persistent and pervasive process that is called the underwriting
cycle or the insurance cycle. It has been observed in many countries – with
the growing importance of international reinsurance5 and the integration of
deregulated world financial markets – these cycles are increasingly globaliz-
ing. In soft markets, underwriting standards are loosened; prices and profits
are low, and the amount of insurance increases. Insurers who project high
interest rates often welcome risky business with high premiums over rela-
tively safe policies with low premiums, since the premiums are what they
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invest. High interest rates attract many to enter the insurance industry to
underwrite risky policies which generate large premiums to be invested for
impressive returns. While investment income is elevated, premiums stabilize
or even decrease despite deteriorating underwriting results.
In hard markets, underwriting requirements become selective, and prices
and profits rise. Many policies are cancelled or are not renewed, and the
conditions on policies (e.g. deductibles and limits) are made more restrictive
as the volume of insurance coverage declines. The rise in insurance premiums
and the decline in the access to insurance can be so abrupt and severe that
hard markets are frequently referred to as ‘liability crises’. These are crises in
availability, adequacy and affordability. The most recent hard markets have
been from 1975 to 1977, from 1984 to 1987, and from 2001 to the present.
In these hard markets industry premium revenue rises sharply and diffi-
culties in obtaining insurance are commonly featured in the popular media,6
especially in relation to liability insurance – covering such things as workers’
compensation, or damages caused by automobiles, products, environmental
pollution, medical doctors or corporate directors and executives. The under-
writing cycle...
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