Strategic demand for insurance

We focus on the corporate demand for insurance under duopoly. We consider the case in which firms purchase insurance in order to enhance their competitiveness. We show that a higher level of corporate insurance makes a firm more aggressive and its competitor less aggressive in the output market(strategic effect). The optimal coverage of insurance is determined by comparing the strategic effect of insurance and the cost of insurance. The optimal coverage is positive if the strategic effect is greater than the cost of insurance. An interesting implication is that a risk-neutral firm may purchase actuarially unfair insurance. The main strategic effect of insurance comes from the fact that firms purchase insurance before they produce outputs. Insurance makes firms more aggressive due to the limited risk costs of firms.
Publisher
Blackwell Publishing
Issue Date
2006
Description

The author is thankful to two referees, Richard MacMinn (editor), and the participants in the Asia-Pacific Risk and Insurance Association meeting and in the American Risk and Insurance Association meeting in 2004 for their comments. The author is also thankful to Thi Nha Chau for her support.

Citation

Journal of Risk and Insurance, vol. 73, no. 2, pp.279-295

ISSN
0022-4367
DOI
10.1111/j.1539-6975.2006.00174.x
URI
http://hdl.handle.net/10203/5623
Appears in Collection
KGSF-Journal Papers(저널논문)
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