Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2005/10:
Equilibrium in Marine Mutual Insurance Markets with Convex Operating Costs
Knut K. Aase ()
Abstract: The paper 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.
Keywords: Marine Insurance; syndicated market; P&I clubs; equilibrium; economy of scale; diseconomy of scale; (follow links to similar papers)
JEL-Codes: D50; G22; (follow links to similar papers)
35 pages, November 30, 2005
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