Seminar

Insurance, risk aversion, and loss manipulation: An experiment

Adriaan Soetevent (University of Amsterdam)

March 24, 2014, 14:00–15:30

Room MF 323

Industrial Organization seminar

Abstract

We challenge the view that consumers and insurers in insurance markets have a common interest to minimize the value of potential losses. We do this in two ways. First we derive the theoretical result that when consumers are risk-averse, an insurer's profi ts increase with potential loss size. This prediction is subsequently tested in an experimental market insurance game. Our findings show that insurer-subjects do indeed set high losses to induce consumer-subjects to buy insurance and to exploit their risk-aversion. The policy implication is that one should not automatically grant insurance companies buyer-power on grounds that they are an effective countervailing power to offset provider market power.