Risk Management and Public Policies: How prevention challenges monopolistic insurance markets

François Pannequin and Anne Corcos ()
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Anne Corcos: CURAPP-ESS UMR 7319, CNRS, Université de Picardie Jules Verne

No 23-02, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: Using a principal-agent framework, we extend the insurance monopoly model (Stiglitz, 1977) to self-insurance opportunities. Relying on a two-part tariff contract as an analytical tool, we show that an insurance monopoly can achieve the same equilibrium as a competitive insurer. However, in the monopoly situation, the insurer captures all the insurance market surplus. Yet, compared to a monopoly market with insurance only, self-insurance opportunities act as a threat to the insurer, resulting in a cut of the insurer's market power and an increase in the policyholders' welfare. Moreover, within our principal-agent framework, we show that while insurance and self-insurance are substitutes, compulsory self-insurance, and compulsory insurance have non-equivalent effects. Although compulsory self-insurance reduces the market size of the insurer, it has no impact on the policyholder's well-being. On the other hand, mandatory insurance favors the insurer and makes policyholders worse off. The implications of these public policies are discussed.

Keywords: self-insurance; insurance; monopoly; compulsory insurance; public regulation (search for similar items in EconPapers)
JEL-codes: D42 D86 G22 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2023
New Economics Papers: this item is included in nep-com, nep-mic, nep-reg and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:eve:wpaper:23-02

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