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Competition and Insurance Twenty Years Later

Stiglitz, Joseph E.; Rothschild, Michael

We are honored to address the European Group of Risk and Insurance Economists and will take the opportunity to make some reflections on the rather uneasy relationship between insurance and competition. Economists generally prescribe competition as a solution for markets that do not work well. Competition allocates resources efficiently and encourages innovation and attention to what customers want. Insurance markets differ from most other markets because in insurance markets competition can destroy the market rather than make it work better. One of the dimensions along which insurance companies compete is underwriting--trying to ensure that the risks covered are "good" risks or that if a high risk is insured, the premium charged is at least commensurate with the potential cost. The resulting partitioning of risk limits the amount of insurance that potential insurance customers can buy. In the extreme case, such competitive behavior will destroy the insurance market altogether. A simple model illustrates.

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Geneva Papers on Risk and Insurance Theory

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Economics
Published Here
April 18, 2013
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