How prevention challenges monopolistic insurance markets: the non-equivalent effects of insurance and self-insurance obligations

Comment la prévention remet en cause les monopoles d’assurance: le principe de non-équivalence des obligations d’assurance et d’auto-assurance

François Pannequin and Anne Corcos (anne.corcos@u-picardie.fr)
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Anne Corcos: LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne

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Abstract: In a context of relentlessly increasing frequency of climate risks and natural disasters, public policy has no choice but to try to limit their magnitude. We extend Stiglitz's insurance monopoly model (Stiglitz [1977]) to examine the effectiveness of three coverage schemes: the presence of self-insurance opportunities, mandatory insurance and mandatory self-insurance. We highlight three main findings. First, the market power of an insurance monopoly is challenged by the existence of self-insurance. We show that, compared to a monopoly market with insurance alone, self-insurance opportunities threaten the insurer, reducing its market power and increasing the welfare of policyholders. Second, in this context, we find that compulsory insurance has a detrimental effect on the insureds, worsening their situation and returning power to the insurer. Finally, the substitutability between insurance and self-insurance leads us to question the effects of self-insurance obligations. Our model shows that compulsory self-insurance and compulsory insurance do not have equivalent effects. While the compulsory self-insurance reduces the size of the insurer's market, it has no effect on the welfare of the insured. The implications of these public policies are discussed.

Keywords: Self-insurance; Insurance; Monopoly; Compulsory insurance; Public regulation (search for similar items in EconPapers)
Date: 2024-01-04
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Published in Revue Economique, 2024, Vol. 74 (5), pp.739-765. ⟨10.3917/reco.745.0739⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04553129

DOI: 10.3917/reco.745.0739

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