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Risk Mutualization and Competition in Insurance Markets

Marie-Cecile Fagart, Nathalie Fombaron and Meglena Jeleva ()
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Nathalie Fombaron: Thema Université de Paris X-Nanterre, 200 avenue de la République, 32100 Nanterre, France, e-mail: nathalie.fombaron@u-paris10.fr

The Geneva Risk and Insurance Review, 2002, vol. 27, issue 2, 115-141

Abstract: The aim of this paper is to analyze the impact of mutual firms on competition in the insurance market. We distinguish two actors in this market: mutual firms, which belong to their pooled members, and traditional companies, which belong to their shareholders. Our approach differs from the literature by one crucial assumption: the expected utility of the consumers depends on the size of their insurance firm, which generates network externalities in this market. Thus, the choice of a contract results in a trade-off between the premium level and the probability of that premium being ex-post adjusted. The optimal contract offered by a mutual firm involves a systematic ex-post adjustment (negative or positive), while the contracts a company offers imply a fixed premium that is possibly negatively adjusted at the end of the contractual period. In an oligopoly game, we show that three types of configurations are possible at equilibrium: either one mutual firm or insurance company is active, or a mixed structure emerges in which two or more companies share the market with or without a mutual firm. The Geneva Papers on Risk and Insurance Theory (2002) 27, 115–141. doi:10.1023/A:1021948826240

Date: 2002
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The Geneva Risk and Insurance Review is currently edited by Michael Hoy and Nicolas Treich

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