The author can be contacted via e-mail: Knut.Aase@NHH.NO. Thanks to the finance faculty at Anderson Graduate School of Management, UCLA, and in particular my sponsor, Eduardo Schwartz, for hospitality and a stimulating research environment during my sabbatical stay for the academic year 2004-2005. Support from the Norwegian Research Council and SNF is gratefully acknowledged.
Equilibrium in Marine Mutual Insurance Markets with Convex Operating Costs
Article first published online: 8 MAR 2007
Journal of Risk and Insurance
Volume 74, Issue 1, pages 239–268, March 2007
How to Cite
Aase, K. K. (2007), Equilibrium in Marine Mutual Insurance Markets with Convex Operating Costs. Journal of Risk and Insurance, 74: 239–268. doi: 10.1111/j.1539-6975.2007.00209.x
- Issue published online: 8 MAR 2007
- Article first published online: 8 MAR 2007
The article analyzes the possibility of reaching an equilibrium in a market of marine mutual insurance syndicates, called Protection and Indemnity Clubs, or P&I Clubs for short, displaying economies of scale. Our analysis rationalizes some empirically documented findings, and points out an interesting future scenario. We find an equilibrium in a market of mutual marine insurers, in which some smaller clubs, having operating costs above average, may grow larger relative to the other clubs in order to become more cost effective, and where medium to larger cost-efficient clubs may stay unchanged or some even downsize relative to the others. Some of the very large clubs suffering from diseconomies of scale may have a motive to further increase relative to the other clubs. According to observations, most clubs have, during the last decade, expanded significantly in size measured by gross tonnage of entered ships, some clubs have merged, but very few seem to have decreased their underwriting activity, in particular none of the really large ones. The analysis points to the following future scenario: The small and the medium to large clubs converge in size, while there is a possibility for some very large clubs to be present as well.