Insurance Market Games: Scale Effects and Public Policy

We propose a game-theoretic model to study various effects of scale in an insurance market. After reviewing a simple static model of insurer solvency (in which all customers have inelastic demand), we present a one-period game in which both the buyers and sellers of insurance make strategic bids to...

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Bibliographic Details
Published in:Journal of economics (Vienna, Austria) Austria), 1998-01, Vol.67 (2), p.109-134
Main Authors: Powers, Michael R., Shubik, Martin, Yao, Shun Tian
Format: Article
Language:English
Subjects:
Casualty insurance
Customers
Economic equilibrium
Economic models
Equilibrium
Game theory
Games
Homeowners insurance
Insolvency
Insurance
Insurance industry
Insurance markets
Insurance premiums
Insurance providers
Insurance regulation
Market
Prices
Public policy
Risk aversion
Studies
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Summary:We propose a game-theoretic model to study various effects of scale in an insurance market. After reviewing a simple static model of insurer solvency (in which all customers have inelastic demand), we present a one-period game in which both the buyers and sellers of insurance make strategic bids to determine market price and quantity. For the case in which both buyers and sellers are characterized by constant absolute risk aversion, we show that a unique market equilibrium exists under certain conditions. For the special case of risk-neutral insurers, we then consider how both the price and quantity of insurance, as well as other quantities of interest to public-policy decision makers, are affected by the number of insurance firms, the number of customers, and the total amount of capital provided by investors.
ISSN:0931-8658
1617-7134
DOI:10.1007/BF01236065