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Risk Mutualization and Competition in Insurance Markets

Author

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  • Marie-Cécile Fagart

    (Crest-Lei, Université de Rouen, 27 rue des Saints Peres, 75005 Paris, France, e-mail: fagart@ensae.fr)

  • Nathalie Fombaron

    (Thema Université de Paris X-Nanterre, 200 avenue de la République, 32100 Nanterre, France, e-mail: nathalie.fombaron@u-paris10.fr)

  • Meglena Jeleva

    (EUREQua, LEN-C3E, Université de Nantes, 106 boulevard de l'Hôpital, 75013 Paris, France, e-mail: jeleva@univ-paris1.fr)

Abstract

The aim of this paper is to analyze the impact of mutual firms on competition in the insurance market. We distinguish two actors in this market: mutual firms, which belong to their pooled members, and traditional companies, which belong to their shareholders. Our approach differs from the literature by one crucial assumption: the expected utility of the consumers depends on the size of their insurance firm, which generates network externalities in this market. Thus, the choice of a contract results in a trade-off between the premium level and the probability of that premium being ex-post adjusted. The optimal contract offered by a mutual firm involves a systematic ex-post adjustment (negative or positive), while the contracts a company offers imply a fixed premium that is possibly negatively adjusted at the end of the contractual period. In an oligopoly game, we show that three types of configurations are possible at equilibrium: either one mutual firm or insurance company is active, or a mixed structure emerges in which two or more companies share the market with or without a mutual firm. The Geneva Papers on Risk and Insurance Theory (2002) 27, 115–141. doi:10.1023/A:1021948826240

Suggested Citation

  • Marie-Cécile Fagart & Nathalie Fombaron & Meglena Jeleva, 2002. "Risk Mutualization and Competition in Insurance Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 27(2), pages 115-141, December.
  • Handle: RePEc:pal:genrir:v:27:y:2002:i:2:p:115-141
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    References listed on IDEAS

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    1. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
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    Cited by:

    1. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    2. Georges Dionne & Nathalie Fombaron & Neil Doherty, 2012. "Adverse Selection in Insurance Contracting," Cahiers de recherche 1231, CIRPEE.

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