Essays in the economics of insurance markets

This dissertation investigates several aspects of the economics of insurance markets. First, conditions under which policies with deductible provisions, coinsurance provisions, or premium rebates are optimal are given. Results of previous papers on indemnity costs are considered as special cases. For both personal and commercial lines of insurance, further applications consider income taxes, interest income and acquisition costs. Second, the effect of individuals' characteristics on the trade-off between risk-sharing and incentives in a competitive insurance market affected by moral hazard is studied. An increase in the utility cost of effort decreases both prevention and coverage, while an increase in productivity of effort decreases loss frequencies and increases coverage. Decreases of utility in the loss state increase both prevention and coverage. Additional results establish the effect of wealth and risk aversion changes. Third, features of insurance markets that affect the use of reinsurance are examined. An active reinsurance market exists when the direct market is imperfectly competitive. The manager of an insurance firm with monopoly power takes reinsurance in preference to holding this on own account. Market power in the reinsurance market also restricts reinsurance. The manager of a monopsonistic insurer takes reinsurance when risk aversion is greater than that of clients; this is consistent with the interests of owners. The use of reinsurance is then decreasing with the ratio of policy-holder to manager risk aversion coefficients. Costs incurred by either insurers or reinsurers in the reinsurance market reduce the use of reinsurance, while costs incurred by insurers in the original transaction leave coverage provided by insurers themselves unchanged.Business, Sauder School ofGraduat