Contractual Provisions, Organizational Structure, and Conflict Control in Insurance Markets

TLDR

Previous insurance analysis has largely focused elsewhere, whereas this paper emphasizes a different perspective. The study aims to develop a positive theory of insurance contracting and examine how cost differences across insurance lines affect contracting and control technology. They construct a positive theory of insurance contracting, arguing that incentive conflicts arise when discretionary action is authorized and that contractual provisions and organizational structures mitigate these conflicts within the insurance market. The analysis yields testable implications regarding the distribution of contractual provisions—upper limits, deductibles, coinsurance—and organizational structures—Lloyd's Associations, mutuals, stocks—across insurance lines.

Abstract

We provide a foundation for a positive theory of insurance contracting with examples of its testable predictions. We argue that incentive conflicts arise when discretionary action is authorized and that contractual provisions and organizational structures control sources of conflict within the insurance market. Our emphasis differs from much of the previous insurance analysis. We focus on the implications of cost differences across insurance lines in the contracting/control technology. Our analysis yields testable implications about the distribution and contractual provisions (such as upper limits, deductibles, and coinsurance) and organizational structures (such as Lloyd's Associations, mutuals, and stocks) across lines of insurance.