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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.

Suggested Citation

  • Harris Schlesinger & Emilio Venezian, 1986. "Insurance Markets with Loss-Prevention Activity: Profits, Market Structure, and Consumer Welfare," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 227-238, Summer.
  • Handle: RePEc:rje:randje:v:17:y:1986:i:summer:p:227-238
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    References listed on IDEAS

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    1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    2. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-483, December.
    3. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
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    Cited by:

    1. Hofmann, Annette, 2005. "Internalizing externalities of loss-prevention through insurance monopoly: An analysis of interdependent risks," Working Papers on Risk and Insurance 16, University of Hamburg, Institute for Risk and Insurance.
    2. Jiazhen Peng & Xiaojun Shan & Yang Gao & Yohannes Kesete & Rachel Davidson & Linda Nozick & Jamie Kruse, 2014. "Modeling the integrated roles of insurance and retrofit in managing natural disaster risk: a multi-stakeholder perspective," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 74(2), pages 1043-1068, November.
    3. Adriaan Soetevent & Liting Zhou, 2016. "Loss Modification Incentives for Insurers Under Expected Utility and Loss Aversion," De Economist, Springer, pages 41-67.
    4. Alexander Muermann & Howard Kunreuther, 2007. "Self-Protection and Insurance with Interdependencies," NBER Working Papers 12827, National Bureau of Economic Research, Inc.
    5. Eeckhoudt, L. & Godfroid, Ph. & Gollier, C., 1997. "Willingness to pay, the risk premium and risk aversion," Economics Letters, Elsevier, vol. 55(3), pages 355-360, September.
    6. Arthur Snow, 2015. "Monopolistic Insurance and the Value of Information," Risks, MDPI, Open Access Journal, vol. 3(3), pages 1-13, July.
    7. Bradley Herring, 2010. "Suboptimal provision of preventive healthcare due to expected enrollee turnover among private insurers," Health Economics, John Wiley & Sons, Ltd., vol. 19(4), pages 438-448.
    8. Courbage, Christophe & Rey, Béatrice & Treich, Nicolas, 2013. "Prevention and precaution," TSE Working Papers 13-445, Toulouse School of Economics (TSE).
    9. Kane, Edward J., 1995. "Three paradigms for the role of capitalization requirements in insured financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 431-459, June.
    10. Yavuz Yasar, 2005. "Screening For Cancer And Market Structure:A Multilevel Analysis For Mammogram And Pap-Smear Utilization In The U.S," HEW 0503002, EconWPA.
    11. Fuentes-Castro, Hugo Javier. & Reyna-Bernal, Ana María., 2014. "Comparando con las grandes. Retos para las aseguradoras en reducción de costos," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 0(19), pages 7-32, segundo s.
    12. Avi Dor, 2001. "Administered Prices and Suboptimal Prevention: Evidence from the Medicare Dialysis Program," NBER Working Papers 8123, National Bureau of Economic Research, Inc.
    13. Avi Dor, 2004. "Optimal Price Rules, Administered Prices and Suboptimal Prevention: Evidence from a Medicare Program," Journal of Regulatory Economics, Springer, vol. 25(1), pages 81-104, January.

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