How prevention challenges monopolistic insurance markets : the non-equivalent effects of insurance and self-insurance obligations[Comment la prévention remet en cause les monopoles d’assurance : le principe de non-équivalence des obligations d’assurance et d’auto-assurance]

In a context of relentlessly increasing frequency of climate risks and natural disasters, public policy has no choice but to try to limit their magnitude. We extend Stiglitz's insurance monopoly model (Stiglitz [1977]) to examine the effectiveness of three coverage schemes: the presence of self-insurance opportunities, mandatory insurance and mandatory self-insurance. We highlight three main findings. First, the market power of an insurance monopoly is challenged by the existence of self-insurance. We show that, compared to a monopoly market with insurance alone, self-insurance opportunities threaten the insurer, reducing its market power and increasing the welfare of policyholders. Second, in this context, we find that compulsory insurance has a detrimental effect on the insureds, worsening their situation and returning power to the insurer. Finally, the substitutability between insurance and self-insurance leads us to question the effects of self-insurance obligations. Our model shows that compulsory self-insurance and compulsory insurance do not have equivalent effects. While the compulsory self-insurance reduces the size of the insurer's market, it has no effect on the welfare of the insured. The implications of these public policies are discussed.