IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Switching Cost, Competition and Pricing in the Property/Casualty Insurance Market for Large Commercial Accounts

  • Lisa L. Posey
Registered author(s):

    With large commercial accounts, a small number of insurers negotiate directly with clients on an individual basis and prices are set individually. This paper applies a game theoretic bargaining model to analyze a risk manager’s choice of insurer in a multi-period setting, along with insurers’ pricing decisions. Insurers set prices and the risk manager chooses an insurer in each of three periods. There exist switching costs for policyholders which are incurred at the time a switch is made to a different insurer. Other switching costs are revealed over time with a certain probability as the client observes the claims management practices of the insurer in the event of a large claim. The conclusions are that, in equilibrium, it will be optimal for an insurer trying to attract business away from a competitor to price the coverage below cost in the second period with the expectation that it can price above cost in the third period. If the client switches, they will pay a price below marginal cost in the second period, but above marginal cost in the third. If the client remains with the original insurer, they are likely to pay above marginal cost in both periods, but certainly in the third period. Switching from one insurer to another may occur in either period if the original insurer does not provide a highly valuable service during the claims management process and the expectation is that the competitor will be sufficiently better to overcome the initial switching costs.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.insuranceissues.org/PDFs/261P.pdf
    Download Restriction: no

    Article provided by Western Risk and Insurance Association in its journal Journal of Insurance Issues.

    Volume (Year): 26 (2003)
    Issue (Month): 1 ()
    Pages: 29-50

    as
    in new window

    Handle: RePEc:wri:journl:v:26:y:2003:i:1:p:29.50
    Contact details of provider:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:wri:journl:v:26:y:2003:i:1:p:29.50. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (James Barrese)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.