Optimal brokerage commissions for fair insurance : a first order approach
GENEVA Risk and Insurance Review
First-order approach, Insurance brokerage commissions, Maximum likelihood ratio condition, Mean-preserving spread-reducing effort, Principal-agent problem
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 (MPSR) effort is introduced to model 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. 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.
Copyright © 2011 The International Association for the Study of Insurance Economics 1554-964X/11. Access to external full text or publisher's version may require subscription.
Hau, A. (2011). Optimal brokerage commissions for fair insurance: A first order approach. The Geneva Risk and Insurance Review, 36(2), 189-201. doi: 10.1057/grir.2010.11