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Raising Capital in an Insurance Oligopoly Market

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  • Julien Hardelin

    (Département d’Économie, École Polytechnique, 91128 Palaiseau Cedex, France and AgroParisTech ENGREF, 19 avenue du Maine, 75732 Paris Cedex 15, France)

  • Sabine Lemoyne de Forges

    (Département d’Économie, École Polytechnique, 91128 Palaiseau Cedex, France and AgroParisTech ENGREF, 19 avenue du Maine, 75732 Paris Cedex 15, France)

Abstract

We consider an oligopoly market where firms offer insurance coverage against a risk characterised by aggregate uncertainty. Firms behave as if they were risk averse for a standard reason of costly external finance. The model consists in a two-stage game where firms choose their internal capital level at stage one and compete on price at stage two. We characterise the subgame perfect Nash equilibria of this game and focus attention on the strategic impact of insurers capital choice. We discuss the model with regard to the insurance industry specificities and regulation.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Risk and Insurance Review.

Volume (Year): 37 (2012)
Issue (Month): 1 (March)
Pages: 83-108

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Handle: RePEc:pal:genrir:v:37:y:2012:i:1:p:83-108

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  1. Wambach, Achim, 1999. "Bertrand competition under cost uncertainty," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 941-951, October.
  2. Asplund, Marcus, 2002. "Risk-averse firms in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 995-1012, September.
  3. Mattias K. Polborn, 1998. "A Model of an Oligopoly in an Insurance Market," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 23(1), pages 41-48, June.
  4. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
  5. Froot, Kenneth A. & O'Connell, Paul G.J., 2008. "On the pricing of intermediated risks: Theory and application to catastrophe reinsurance," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 69-85, January.
  6. Matutes, Carmen & Vives, Xavier, 1995. "Imperfect Competition, Risk Taking, and Regulation in Banking," CEPR Discussion Papers 1177, C.E.P.R. Discussion Papers.
  7. Mary A. Weiss & Joon-Hai Chung, 2004. "U.S. Reinsurance Prices, Financial Quality, and Global Capacity," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(3), pages 437-467.
  8. Zanjani, George, 2002. "Pricing and capital allocation in catastrophe insurance," Journal of Financial Economics, Elsevier, vol. 65(2), pages 283-305, August.
  9. Kenneth A. Froot, 1999. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 7286, National Bureau of Economic Research, Inc.
  10. Ray Rees & Hugh Gravelle & Achim Wambach, 1999. "Regulation of Insurance Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 24(1), pages 55-68, June.
  11. Kenneth A. Froot, 2007. "Risk Management, Capital Budgeting, and Capital Structure Policy for Insurers and Reinsurers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(2), pages 273-299.
  12. Wanzenried, Gabrielle, 2003. "Capital structure decisions and output market competition under demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 171-200, February.
  13. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
  14. John Duncan & Robert J. Myers, 2000. "Crop Insurance under Catastrophic Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 842-855.
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Cited by:
  1. repec:hal:wpaper:halshs-00800460 is not listed on IDEAS
  2. repec:hal:wpaper:hal-00746245 is not listed on IDEAS
  3. repec:hal:ciredw:halshs-00800460 is not listed on IDEAS
  4. Christophe Dutang & Hansjoerg Albrecher & Stéphane Loisel, 2013. "Competition among non-life insurers under solvency constraints: A game-theoretic approach," Post-Print hal-00746245, HAL.
  5. Lemoyne de Forges, Sabine & Bibas, Ruben & Hallegatte, Stephane, 2011. "A dynamic model of extreme risk coverage : resilience and efficiency in the global reinsurance market," Policy Research Working Paper Series 5807, The World Bank.
  6. Radoslav S. Raykov, 2014. "Uncertain Costs and Vertical Differentiation in an Insurance Duopoly," Working Papers 14-14, Bank of Canada.

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