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Quality, self-regulation, and competition: the case of insurance

Author

Summary, in English

In this paper, insurers' credibility problems explain contracting, co-operation, and regulation in the insurance industry. First, it is noted that cheating by policyholders may be eliminated if the insurer withholds compensation on the basis of detecting careless behaviour with high enough probability. Then, assuming that care taken is imperfectly observable and non-contractible, the problem that insurers may deceive policyholders is addressed. In a repeated game, insurers' building a reputation for being generous can sustain an efficient outcome. Finally, intra-industry co-operation is considered; it is shown that the industry's monitoring care and "fair" compensation, while sustaining monopolistic pricing, mitigates negative credibility externalities. (C) 2003 Elsevier Science B.V. All rights reserved.

Publishing year

2003

Language

English

Pages

267-280

Publication/Series

Insurance: Mathematics and Economics

Volume

32

Issue

2

Document type

Journal article

Publisher

Elsevier

Topic

  • Economics

Keywords

  • generosity
  • competition
  • credibility externalities
  • self-regulation

Status

Published

ISBN/ISSN/Other

  • ISSN: 1873-5959