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Competition and Insurance Twenty Years Later

Author

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  • Michael Rothschild

    (Woodrow Wilson School of Public and International Affairs, Princeton University, Princeton, NJ 08544)

  • Joseph E. Stiglitz

    (The World Bank and Stanford University, Stanford, CA 94305)

Abstract

We are honored to address the European Group of Risk and Insurance Economists and will take the opportunity to make some reflections on the rather uneasy relationship between insurance and competition.Economists generally prescribe competition as a solution for markets that do not work well. Competition allocates resources efficiently and encourages innovation and attention to what customers want. Insurance markets differ from most other markets because in insurance markets competition can destroy the market rather than make it work better.One of the dimensions along which insurance companies compete is underwriting—trying to ensure that the risks covered are “good” risks or that if a high risk is insured, the premium charged is at least commensurate with the potential cost. The resulting partitioning of risk limits the amount of insurance that potential insurance customers can buy. In the extreme case, such competitive behavior will destroy the insurance market altogether. A simple model illustrates. The Geneva Papers on Risk and Insurance Theory (1997) 22, 73–79. doi:10.1023/A:1008607915478

Suggested Citation

  • Michael Rothschild & Joseph E. Stiglitz, 1997. "Competition and Insurance Twenty Years Later," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 22(2), pages 73-79, December.
  • Handle: RePEc:pal:genrir:v:22:y:1997:i:2:p:73-79
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    Citations

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    Cited by:

    1. Dionne, G. & Doherty, N., 1991. "Adverse Selection In Insurance Markets: A Selective Survey," Cahiers de recherche 9105, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    2. Normann Lorenz, 2013. "Adverse selection and risk adjustment under imperfect competition," Research Papers in Economics 2013-05, University of Trier, Department of Economics.
    3. Bernard Salanié, 2017. "Equilibrium in Insurance Markets: An Empiricist’s View," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 42(1), pages 1-14, March.
    4. Henri Loubergé, 1998. "Risk and Insurance Economics 25 Years After," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 23(4), pages 540-567, October.
    5. Casper H. de Jong, 2021. "Risk classification and the balance of information in insurance; an alternative interpretation of the evidence," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 24(4), pages 445-461, December.
    6. Belli, Paolo, 2001. "How adverse selection affects the health insurance market," Policy Research Working Paper Series 2574, The World Bank.
    7. Joseph E. Stiglitz, 2004. "Information and the Change in the Paradigm in Economics, Part 2," The American Economist, Sage Publications, vol. 48(1), pages 17-49, March.
    8. Kosenko, Andrew & Stiglitz, Joseph & Yun, Jungyoll, 2023. "Bilateral information disclosure in adverse selection markets with nonexclusive competition," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 144-168.
    9. Nicos A. Scordis & Yoshihiko Suzawa & Astrid Zwick & Lucia Ruckner, 2014. "Principles for Sustainable Insurance: Risk Management and Value," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 17(2), pages 265-276, September.
    10. Agnès Couffinhal, 2000. "De l'antisélection à la sélection en assurance santé : pour un changement de perspective," Économie et Prévision, Programme National Persée, vol. 142(1), pages 101-121.
    11. Dionne, Georges & Fombaron, Nathalie & Doherty, Neil, 2012. "Adverse selection in insurance contracting," Working Papers 12-8, HEC Montreal, Canada Research Chair in Risk Management.

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