On the uselessness of self-insurance clauses?

Marielle Brunette (), Corcos Anne (), Stéphane Couture and François Pannequin
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Corcos Anne: Curapp - EES, Université de Picardie

Economics Bulletin, 2019, vol. 39, issue 2, 830-837

Abstract: An insurer can monitor the policyholder's prevention effort when it is observable ex-post by using a contract clause. The literature on insurance contracts does not explicitly address the role of contract clauses. We examine the role of such clauses in case of self-insurance. Because of the substitutability between insurance and self-insurance, contract clauses focused on self-insurance investments could cause a possible deterrent effect on insurance demand, highlighting their puzzling nature. In a theoretical model, we examine two arguments to overcome the compulsory self-insurance clause paradox: the observability of the self-insurance investment and the role of the self-insurance clause on insurance demand. The fact that self-insurance investments are not observable ex-ante cannot justify the use of a mandatory clause. Neither the demand for insurance nor the demand for prevention is observability-dependent. Therefore, self-insurance clauses are, at best, useless, at worst, counterproductive: when binding, they reduce the size of the insurance market.

Keywords: risk; insurance; self-insurance; contract clause (search for similar items in EconPapers)
JEL-codes: D8 (search for similar items in EconPapers)
Date: 2019-04-25
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Citations: View citations in EconPapers (2)

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