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Title:Internalizing externalities of loss-prevention through insurance monopoly: An analysis of interdependent risks PDF Logo
Authors:Hofmann, Annette
Issue Date:2005
Series/Report no.:Working Papers on Risk and Insurance 16
Abstract:When risks are interdependent, loss-prevention activities of one agent influence the risks faced by others. The social return to an investment in loss-prevention is greater than the private return. From a perspective of social welfare, the market allocation is not optimal and leads to under-investment in prevention allround. This article considers consumer welfare under conditions of interdependent risks and demonstrates that a monopolistic insurer can internalize the arising externalities by setting appropriate prevention incentives through insurance premiums. A monopoly insurance solution reduces not only costs of risk selection, but can also play an important role in loss-prevention.
insurance monopoly
Nash equilibrium
social welfare
Document Type:Working Paper
Appears in Collections:Working Papers on Risk and Insurance, Institut für Versicherungsbetriebslehre, Universität Hamburg

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