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Insurance Markets with Loss-Prevention Activity: Profits, Market Structure, and Consumer Welfare

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  • Harris Schlesinger
  • Emilio Venezian

Abstract

This article considers the joint production of insurance protection and loss prevention by insurers. We first examine the loss distribution of consumers that is potentially the most profitable for insurers. Unlike in the preponderance of the insurance literature, which assumes cost-based pricing of insurance policies, we allow the insurer to charge whatever price the market will bear. We then examine the expected-profit-maximizing strategy of assumes cost-based pricing of insurance policies, we allow the insurer to charge whatever price the market will bear. We then examine the expected-profit-maximizing strategy of the insurer in several different market settings. Whether the insurance protection and loss-prevention services can be perfectly bundled plays a key roll in the insurer's pricing decision. We consider consumer welfare under various market settings and demonstrate that a consumer may be better off when the insurance market is monopolistic rather than competitive. Finally, we consider whether monopoly power in the loss-prevention market leads to monopoly power in an otherwise perfectly contestable insurance market. We also show conditions under which a loss-prevention monopolist would increase expected profit by integrating into the insurance market.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 17 (1986)
Issue (Month): 2 (Summer)
Pages: 227-238

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Handle: RePEc:rje:randje:v:17:y:1986:i:summer:p:227-238

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Cited by:
  1. Kane, Edward J., 1995. "Three paradigms for the role of capitalization requirements in insured financial institutions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 19(3-4), pages 431-459, June.
  2. Yavuz Yasar, 2005. "Screening For Cancer And Market Structure:A Multilevel Analysis For Mammogram And Pap-Smear Utilization In The U.S," HEW, EconWPA 0503002, EconWPA.
  3. Courbage, Christophe & Rey, Béatrice & Treich, Nicolas, 2013. "Prevention and precaution," TSE Working Papers, Toulouse School of Economics (TSE) 13-445, Toulouse School of Economics (TSE).
  4. Avi Dor, 2004. "Optimal Price Rules, Administered Prices and Suboptimal Prevention: Evidence from a Medicare Program," Journal of Regulatory Economics, Springer, Springer, vol. 25(1), pages 81-104, January.
  5. Bradley Herring, 2010. "Suboptimal provision of preventive healthcare due to expected enrollee turnover among private insurers," Health Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 19(4), pages 438-448.
  6. Alexander Muermann & Howard Kunreuther, 2007. "Self-Protection and Insurance with Interdependencies," NBER Working Papers 12827, National Bureau of Economic Research, Inc.
  7. Hofmann, Annette, 2005. "Internalizing externalities of loss-prevention through insurance monopoly: An analysis of interdependent risks," Working Papers on Risk and Insurance, University of Hamburg, Institute for Risk and Insurance 16, University of Hamburg, Institute for Risk and Insurance.
  8. Avi Dor, 2001. "Administered Prices and Suboptimal Prevention: Evidence from the Medicare Dialysis Program," NBER Working Papers 8123, National Bureau of Economic Research, Inc.
  9. Eeckhoudt, L. & Godfroid, Ph. & Gollier, C., 1997. "Willingness to pay, the risk premium and risk aversion," Economics Letters, Elsevier, Elsevier, vol. 55(3), pages 355-360, September.

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