A Model of Insurance Premium in Response to Probability of Loss

Abstract

We apply a microeconomics model of the insurance firm designed to provide insight into firm price reaction to changes in loss probability. Based on the optimal insurance quantity and price from both consumer and firm points of view, comparative statics is shown in which buyer and seller interact to determine the insurance premium due to changes in the probability of loss. To test the theoretical model, we use a panel data set of 11 Korean liability insurance firms from 2008 to 2015. The regression results show that the insurance premium charged by the firm with more coverage benefit is more responsive to the probability of loss than that of the firm with less coverage benefit, in line with our theoretical result.