TY - JOUR
T1 - Optimal brokerage commissions for fair insurance : a first order approach
AU - HAU, Arthur
PY - 2011/12
Y1 - 2011/12
N2 - 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.
AB - 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.
KW - First-order approach
KW - Insurance brokerage commissions
KW - Maximum likelihood ratio condition
KW - Mean-preserving spread-reducing effort
KW - Principal-agent problem
UR - http://commons.ln.edu.hk/sw_master/6609
UR - https://www.scopus.com/inward/record.uri?eid=2-s2.0-82455188204&doi=10.1057%2fgrir.2010.11&partnerID=40&md5=57648ad679fbf88757423e597c7f3771
U2 - 10.1057/grir.2010.11
DO - 10.1057/grir.2010.11
M3 - Journal Article (refereed)
VL - 36
SP - 189
EP - 201
JO - GENEVA Papers on Risk and Insurance Theory
JF - GENEVA Papers on Risk and Insurance Theory
SN - 1554-964X
IS - 2
ER -