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Working Papers on Risk and Insurance No. 16
Annette Hofmann, Internalizing Externalities of Loss-Prevention through Insurance Monopoly: An Analysis of Interdependent Risks, November 2005, erschienen in: Geneva Risk and Insurance Review, 32 (2007), 91 – 111.
Zusammenfassung
When risks are interdependent, loss-prevention activities of one agent influence the risks faced by others. The social return to an investment in loss-prevention is greater than the private return. From a perspective of social welfare, the market allocation is not optimal and leads to under-investment in prevention allround. This article considers consumer welfare under conditions of interdependent risks and demonstrates that a monopolistic insurer can internalize the arising externalities by setting appropriate prevention incentives through insurance premiums. A monopoly insurance solution reduces not only costs of risk selection, but can also play an important role in loss-prevention.
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