Efficient Monopolies: The Limits of Competition in the European Property Insurance Market
Book by Oxford University Press, 2004
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.
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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. Third, in property insurance, the best way to keep claims low is to invest into adequate preventive activities. These often take the form of local public goods (land zoning, firefighting, and so on). When insurance is provided by a state monopoly, it is possible to integrate prevention and insurance. The data for Switzerland clearly show that this integration leads to substantial increases in resources devoted to preventive activities and corresponding reductions in claims. I would like to take this opportunity to thank the many individuals who patiently explained to me the institutional specificities of the markets they work in, and provided me with the necessary data. My special thanks go to Martin Kamber of the IRV in Bern, without whose patient help and encouragement this book would most probably never have been completed. Any remaining errors are, of course, solely my own responsibility.
The final two decades of the twentieth century saw a wave of privatisations. Many governments in the industrial world withdrew either partially or completely from large sectors of the economy. Well-known examples are telecommunications, railways, air traffic, electricity, and water, which were all liberalised. A number of factors gave rise to this development. Technological changes meant that sectors which previously had all the hallmarks of a natural monopoly could be opened up to competition. Market liberalisation was an opportunity to curb the power of the trade unions. Politicians began to realise that competitive markets provide a number of benefits to consumers, including:
• the private sector's innovative drive;
• the product differentiation that results from private firms' efforts to distinguish themselves from their competitors, and adaptation of their services to consumer demands; and
• the more rigorous cost control of private (profit-maximising) firms.
Furthermore, economic freedom is an important feature of any free society, and powerful arguments are required to justify curtailing freedom of contract.