Efficient Monopolies: The Limits of Competition in the European Property Insurance Market

Efficient Monopolies: The Limits of Competition in the European Property Insurance Market

Efficient Monopolies: The Limits of Competition in the European Property Insurance Market

Efficient Monopolies: The Limits of Competition in the European Property Insurance Market

Synopsis

This book presents startling evidence that state monopolies can produce better outcomes than the free market. It provides an empirical comparison of the property insurance market in five European countries: Britain, Spain, France, Switzerland, and Germany. The market and cost structures of insurers in each country are described, and particular features of each market and the outcomes for customers examined. The regulatory frameworks vary widely from country to country and so do the market outcomes, both in terms of premium level and in terms of available insurance cover.

Excerpt

This book studies the market for property insurance in five countries, Britain, Spain, France, Switzerland, and Germany. It argues that in this market state monopolies outperform competitive markets, both in the provision of insurance against standard risks such as fire and in the provision of insurance against 'uninsurable' risks such as floods or subsidence. We hope that our empirical findings will stimulate economists to think more deeply about the relative merits of state provision and competitive markets.

The main driving forces underlying our results can be briefly summarised. First, competitive insurers typically work with high sales and administrative costs, as a result of which claims payments make up only about 50 per cent of premium income. State monopolies can work with considerably lower 'load factors', thus allowing substantial costs savings to the customers.

Second, risk selection plays an important role on the market for property insurance. Private insurers try to avoid selling insurance to the bad risks and/or substantially reduce the cover for customers who at some point in time turn out to be bad risks. The non-availability of adequate insurance against risks where the owners stand to lose most of their worldly possessions results in substantial welfare losses. For state monopolies, risk selection is not an issue, and they provide better insurance even to the bad risks.

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