Optimal Brokerage Commissions for Fair Insurance: A First Order Approach

Arthur Hau
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Arthur Hau: Lingnan University, Tuen Mun, New Territories, Hong Kong

The Geneva Risk and Insurance Review, 2011, vol. 36, issue 2, 189-201

Abstract: This paper studies a principal-agent insurance brokerage problem with a risk-averse principal (an insured) and a risk-neutral agent (a broker). The concept of “mean-preserving, spread-reducing” (MPSR) effort is introduced to model the broker's activities. Using the first-order approach, it is shown that under some common conditions, the insured may “concavify” the reward function to induce the risk-neutral agent to exert MPSR brokering effort. These conditions, together with an additional condition, guarantee the validity of the first-order approach even when the monotone likelihood ratio condition (used exclusively to justify the first-order approach) is violated.

Date: 2011
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