The Information Asymmetry In Insurance From The "Principle Of Utmost Good Faith"

Since18th century, the principle of utmost good faith has been a basicprinciple of insurance practice. For example, most of the countries withincommon law approve that insurance contracts are contracts of utmost goodfaith. Although countries within the continental law system don’texpressly provide this rule in insurance laws, we can still make it out.Also, we have the rule in our insurance law that the parties concernedin insurance activities shall abide by the principle of good faith in theexercise of rights and performance of obligations. It proves that Chinahas this principle in practice, just as other countries. Why is it soimportant? The seriousness of information asymmetry may explain it.This paper stands by the principle of utmost good faith, and setsforth my opinions with views of the insurers and the insured. The insureris difficult to comprehensive understanding of insurance risk, as wellas the information of the insured themselves. The insurer has nothing todo to know more about the insured’s history of insurance and claimant.He just cannot find ways to update the change of risks. Even getting intothe claimant, the insurer is still in a lack of clearness. It pushes themto classify their customers, which makes things worse. On the other side,the insured lacks professional knowledge of insurance, and also cannotcome into the understanding of the credit status. The insured cannot makea good choice. Broken companies will provide a lower price to welcome theirnew customers. All those situations trigger a breaking-down market, andpush the market to the end.The principle of utmost good faith appeared to solve the informationasymmetry. China has made a rule of obligation to inform, obligation todisclose, and so on. Also we are making efforts to develop a healthy market, providing healthy intermediary service, hoping that it will work.