Imperfect Tests and Natural Insurance Monopolies

28 Pages Posted: 19 Jun 1997

See all articles by Winand Emons

Winand Emons

University of Bern - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: December 2000

Abstract

We consider a housing insurance market in which buildings have different damage probabilities. Insurers use imperfect tests to find out about the buildings' damage types. The insurance market is a natural monopoly. If more than one insurer is active, high risk house owners continue to apply to insurers until they are eventually assigned to a low risk class. First we show that the natural insurance monopoly need not be sustainable. Then we show that in the equilibrium industry structure the incumbent may accomodate entry even when the natural monopoly is sustainable. Our theoretical findings are thus able to explain recent observations from Germany and Switzerland where housing insurance damage rates and prices went up drastically after the transition from state monopolies to competitive environments.

JEL Classification: G22, L12, L85

Suggested Citation

Emons, Winand, Imperfect Tests and Natural Insurance Monopolies (December 2000). Available at SSRN: https://ssrn.com/abstract=37746 or http://dx.doi.org/10.2139/ssrn.37746

Winand Emons (Contact Author)

University of Bern - Department of Economics ( email )

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HOME PAGE: http://staff.vwi.unibe.ch/emons

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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