Insurance As a Market in Contingent Claims: Structure and Performance

Insurance considered as brokerage is very different from insurance considered as holding funds. The scale economies which are ubiquitous in the funds model dissipate when insurance is considered as intermediation. There appear to be no barriers to competition, for the potential entrant has no need to achieve large size, although economies of internal clearing give firms an incentive to merge. The alternative to insurance in the brokerage model is a combination of incorporation and reinsurance. Even in the presence of a state-imposed cartel this alternative limits the possible scope of insurance price manipulation. Contrary to the view of the funds theory -- that insurance profitability depends on holding and safeguarding an appropriate fund -- here capital market prices are the determinants. Since capital market prices are not in the control of insurance regulators, their intervention in setting insurance prices leads to gaps in insurance coverage.