Equilibrium in Marine Mutual Insurance Markets with Convex Operating Costs

30 Pages Posted: 4 Mar 2007

See all articles by Knut K. Aase

Knut K. Aase

Norwegian School of Economics (NHH) - Department of Business and Management Science

Abstract

The article analyzes the possibility of reaching an equilibrium in a market of marine mutual insurance syndicates, called Protection and Indemnity Clubs, or P&I Clubs for short, displaying economies of scale. Our analysis rationalizes some empirically documented findings, and points out an interesting future scenario. We find an equilibrium in a market of mutual marine insurers, in which some smaller clubs, having operating costs above average, may grow larger relative to the other clubs in order to become more cost effective, and where medium to larger cost-efficient clubs may stay unchanged or some even downsize relative to the others. Some of the very large clubs suffering from diseconomies of scale may have a motive to further increase relative to the other clubs. According to observations, most clubs have, during the last decade, expanded significantly in size measured by gross tonnage of entered ships, some clubs have merged, but very few seem to have decreased their underwriting activity, in particular none of the really large ones. The analysis points to the following future scenario: The small and the medium to large clubs converge in size, while there is a possibility for some very large clubs to be present as well.

Suggested Citation

Aase, Knut K., Equilibrium in Marine Mutual Insurance Markets with Convex Operating Costs. Journal of Risk & Insurance, Vol. 74, No. 1, pp. 239-268, March 2007. Available at SSRN: https://ssrn.com/abstract=967846 or http://dx.doi.org/10.1111/j.1539-6975.2007.00209.x

Knut K. Aase (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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