Optimal insurance brokerage commission

Authors

Arthur HAU

Document Type

Paper Series

Publication Date

6-2005

No.

058-045

Abstract

This paper studies a principal-agent insurance brokerage problem with a risk-averse principal (an insured) and a risk-neutral agent(a broker). The concept of “mean-preserving spread-reducing effort” is introduced to delineate the broker's activities. Using the first-order approach, it is shown that under some common conditions, the insured may “concavify” the reward function to induce the risk-neutral agent to exert MPSR brokering effort. Surprisingly, these conditions together with an additional condition guarantee the validity of the first-order approach even when the monotone likelihood ratio condition (used exclusively to justify the first-order approach) is violated. The case with a risk-averse agent is also considered.

Comments

HKIBS Working Paper Series 058-045

Recommended Citation

Hau, A. (2005). Optimal insurance brokerage commission (HKIBS Working Paper Series 058-045). Retrieved from Lingnan University website: http://commons.ln.edu.hk/hkibswp/96