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Insuring the uninsurable: brokers and incomplete insurance contracts

  • Doherty, Neil A.
  • Muermann, Alexander
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    How do markets spread risk when events are unknown or unknowable and where not anticipated in an insurance contract? While the policyholder can “hold up” the insurer for extra contractual payments, the continuing gains from trade on a single contract are often too small to yield useful coverage. By acting as a repository of the reputations of the parties, we show the brokers provide a coordinating mechanism to leverage the collective hold up power of policyholders. This extends both the degree of implicit and explicit coverage. The role is reflected in the terms of broker engagement, specifically in the ownership by the broker of the renewal rights. Finally, we argue that brokers can be motivated to play this role when they receive commissions that are contingent on insurer profits. This last feature questions a recent, well publicized, attack on broker compensation by New York attorney general, Elliot Spitzer.

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    File URL: http://econstor.eu/bitstream/10419/25461/1/515325678.PDF
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    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2005/24.

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    Date of creation: 2005
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    Handle: RePEc:zbw:cfswop:200524
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    1. Jean-Baptiste, Eslyn L. & Santomero, Anthony M., 2000. "The Design of Private Reinsurance Contracts," Journal of Financial Intermediation, Elsevier, vol. 9(3), pages 274-297, July.
    2. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, March.
    4. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April.
    5. Kimball, Miles S, 1988. "Farmers' Cooperatives as Behavior Toward Risk," American Economic Review, American Economic Association, vol. 78(1), pages 224-32, March.
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