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Strategic Demand for Insurance

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  • S. Hun Seog

Abstract

We focus on the corporate demand for insurance under duopoly. We consider the case in which firms purchase insurance in order to enhance their competitiveness. We show that a higher level of corporate insurance makes a firm more aggressive and its competitor less aggressive in the output market (strategic effect). The optimal coverage of insurance is determined by comparing the strategic effect of insurance and the cost of insurance. The optimal coverage is positive if the strategic effect is greater than the cost of insurance. An interesting implication is that a risk‐neutral firm may purchase actuarially unfair insurance. The main strategic effect of insurance comes from the fact that firms purchase insurance before they produce outputs. Insurance makes firms more aggressive due to the limited risk costs of firms.

Suggested Citation

  • S. Hun Seog, 2006. "Strategic Demand for Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(2), pages 279-295, June.
    • Handle: RePEc:bla:jrinsu:v:73:y:2006:i:2:p:279-295
    DOI: 10.1111/j.1539-6975.2006.00174.x
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    Cited by:

    1. Ilaria Colivicchi & Gianluca Iannucci, 2023. "The Environmental Responsibility of Firms and Insurance Coverage in an Evolutionary Game," Dynamic Games and Applications, Springer, vol. 13(3), pages 801-818, September.
    2. Emilio Venezian, 2009. "Incentive incompatibilities and arbitrage opportunities," Journal of Risk Finance, Emerald Group Publishing, vol. 10(5), pages 422-431, November.
    3. Vincent Y. Chang, 2019. "Does reinsurance purchasing enhance insurers’ competitiveness? Evidence from the U.S. property–liability insurance industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 44(4), pages 595-623, October.
    4. Kirstein Annette & Kirstein Roland & Gerhard Hans, 2010. "Bad Debt Loss Insurance in Settlement and Litigation," Review of Law & Economics, De Gruyter, vol. 6(1), pages 107-124, May.

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