COMPETITION AND INSURANCE 20 YEARS LATER

We are honored to address the European Group of Risk and Insurance Eco nomists and will take the opportunity to make some reflections on the rather uneasy relationship between insurance and competition. Economis ts generally prescribe competition as a solution for markets that do n ot work well. Competition allocates resources efficiently and encourag es innovation and attention to what customers want. Insurance markets differ from most other markets because in insurance markets competitio n can destroy the market rather than make it work better One of the di mensions along which insurance companies compete is underwriting-tryin g to ensure that the risks covered are ''good'' risks or that if a hig h risk is insured, the premium charged is at least commensurate with t he potential cost. The resulting partitioning of risk limits the amoun t of insurance that potential insurance customers can buy. In the extr eme case, such competitive behavior will destroy the insurance market altogether. A simple model illustrates.