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Competition and Insurance Twenty Years Later

Listed author(s):
  • 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)

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

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Article provided by Palgrave Macmillan & International Association for the Study of Insurance Economics (The Geneva Association) in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 22 (1997)
Issue (Month): 2 (December)
Pages: 73-79

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Handle: RePEc:pal:genrir:v:22:y:1997:i:2:p:73-79
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