Insuring the Uninsurable: Brokers and Incomplete Insurance Contracts

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Insuring the Uninsurable: Brokers and Incomplete Insurance Contracts

Author Info

Neil A. Doherty () (The Wharton School, University of Pennsylvania)
Alexander Muermann () (The Wharton School, University of Pennsylvania)

Abstract

How do markets spread risk when events are unknown or unknowable and where not anticipated in an insurance contract? While the policyholder can "hold up" the insurer for extra contractual payments, the continuing gains from trade on a single contract are often too small to yield useful coverage. By acting as a repository of the reputations of the parties, we show the brokers provide a coordinating mechanism to leverage the collective hold up power of policyholders. This extends both the degree of implicit and explicit coverage. The role is reflected in the terms of broker engagement, specifically in the ownership by the broker of the renewal rights. Finally, we argue that brokers can be motivated to play this role when they receive commissions that are contingent on insurer profits. This last feature questions a recent, well publicized, attack on broker compensation by New York attorney general, Elliot Spitzer.

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Publisher Info
Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number 2005/24.

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Length: 25 pages
Date of creation: 24 Jan 2005
Date of revision:
Handle: RePEc:cfs:cfswop:wp200524

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Find related papers by JEL classification:
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-04-08 (All new papers)
NEP-FIN-2006-04-08 (Finance)
NEP-FMK-2006-04-08 (Financial Markets)
NEP-IAS-2006-04-08 (Insurance Economics)

References listed on IDEAS
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