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Optimal Brokerage Commissions for Fair Insurance: A First Order Approach

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  • Arthur Hau

    (Lingnan University, Tuen Mun, New Territories, Hong Kong)

Abstract

This paper studies a principal-agent insurance brokerage problem with a risk-averse principal (an insured) and a risk-neutral agent (a broker). The concept of “mean-preserving, spread-reducing” (MPSR) effort is introduced to model the broker's activities. Using the first-order approach, it is shown that under some common conditions, the insured may “concavify” the reward function to induce the risk-neutral agent to exert MPSR brokering effort. These conditions, together with an additional condition, guarantee the validity of the first-order approach even when the monotone likelihood ratio condition (used exclusively to justify the first-order approach) is violated.

Suggested Citation

  • Arthur Hau, 2011. "Optimal Brokerage Commissions for Fair Insurance: A First Order Approach," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 36(2), pages 189-201, December.
    • Handle: RePEc:pal:genrir:v:36:y:2011:i:2:p:189-201
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