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Brunette Marielle, Corcos Anne, Couture Stéphane and Pannequin François
''On the uselessness of self-insurance clauses ?''
( 2019, Vol. 39 No.2 )
An insurer can monitor the policyholder's prevention effort when it is observable ex-post by using a contract clause. The literature on insurance contracts does not explicitly address the role of contract clauses. We examine the role of such clauses in case of self-insurance. Because of the substitutability between insurance and self-insurance, contract clauses focused on self-insurance investments could cause a possible deterrent effect on insurance demand, highlighting their puzzling nature. In a theoretical model, we examine two arguments to overcome the compulsory self-insurance clause paradox: the observability of the self-insurance investment and the role of the self-insurance clause on insurance demand. The fact that self-insurance investments are not observable ex-ante cannot justify the use of a mandatory clause. Neither the demand for insurance nor the demand for prevention is observability-dependent. Therefore, self-insurance clauses are, at best, useless, at worst, counterproductive: when binding, they reduce the size of the insurance market.
Keywords: risk, insurance, self-insurance, contract clause
JEL: D8 - Information, Knowledge, and Uncertainty: General
Manuscript Received : Mar 06 2019 Manuscript Accepted : Apr 25 2019

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