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Harmful competition in the insurance markets

Author

Listed:
  • De Feo, Giuseppe
  • Hindriks, Jean
Abstract
There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad and that adverse selection is in general worse under competition than under monopoly. The reason is that monopoly can exploit its market power to relax incentive constraints by cross-subsidization between different risk types. Cream-skimming behavior, on the contrary, prevents competitive firms from using implicit transfers. In effect monopoly is shown to provide better coverage to those buying insurance but at the cost of limiting participation to insurance. Performing simulation for di erent distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. However, most of the surplus is retained by the firm and, as a result, most individuals prefer competitive markets notwithstanding their performance is generally poorer than monopoly.

Suggested Citation

  • De Feo, Giuseppe & Hindriks, Jean, 2009. "Harmful competition in the insurance markets," SIRE Discussion Papers 2009-46, Scottish Institute for Research in Economics (SIRE).
    • Handle: RePEc:edn:sirdps:88
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    File URL: http://hdl.handle.net/10943/88
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Less competition is good for insurance
      by Economic Logician in Economic Logic on 2010-05-19 19:14:00

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    Cited by:

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    2. Jenny Simon, 2015. "Optimal Debt Bias in Corporate Income Taxation," CESifo Working Paper Series 5561, CESifo.
    3. Kęstutis Peleckis, 2022. "Application of the Fuzzy VIKOR Method to Assess Concentration and Its Effects on Competition in the Energy Sector," Energies, MDPI, vol. 15(4), pages 1-16, February.
    4. Daniel Attah-Kyei & Charles Andoh & Saint Kuttu, 2023. "Risk, technical efficiency and capital requirements of Ghanaian insurers," Risk Management, Palgrave Macmillan, vol. 25(4), pages 1-27, December.
    5. Alshammari, Ahmad Alrazni & Syed Jaafar Alhabshi, Syed Musa bin & Saiti, Buerhan, 2019. "The impact of competition on cost efficiency of insurance and takaful sectors: Evidence from GCC markets based on the Stochastic Frontier Analysis," Research in International Business and Finance, Elsevier, vol. 47(C), pages 410-427.

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    More about this item

    Keywords

    monopoly; competition; insurance; adverse selection;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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