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The Strategic Role of Insurance: The Warranty Case

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  • S. Hun Seog

Abstract

We consider a model in which risk-neutral firms purchase liability insurance to guarantee their warranty policies. We show that the firms that have no problem in fulfilling their warranty policies have strong incentives to purchase liability insurance. Firms purchase insurance because doing so enhances their competitive powers. This paper complements the literature on corporate demand for insurance by emphasizing the strategic role of insurance. This paper is also related to the literature on the demand for liability insurance under the negligence rule. We show that firms may purchase liability insurance according to their strategic purpose, even though they take due care under the negligence rule.

Suggested Citation

  • S. Hun Seog, 2006. "The Strategic Role of Insurance: The Warranty Case," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 29(1), pages 33-50.
    • Handle: RePEc:wri:journl:v:29:y:2006:i:1:p:33-50
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    File URL: http://www.insuranceissues.org/PDFs/291S.pdf
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    Cited by:

    1. Chong Zhang & Man Yu & Jian Chen, 2022. "Signaling Quality with Return Insurance: Theory and Empirical Evidence," Management Science, INFORMS, vol. 68(8), pages 5847-5867, August.
    2. Zhang, Chong & Yu, Man & Chen, Jian, 2022. "Signaling quality with return insurance: Theory and empirical evidence," Other publications TiSEM 184da313-a89e-4a81-9f23-c, Tilburg University, School of Economics and Management.
    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. S. Hun Seog & Yong J. Hyun, 2009. "Financing as a Marketing Strategy," Marketing Science, INFORMS, vol. 28(3), pages 526-540, 05-06.

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