Fisher Center for Real Estate and Urban Economics

We study a competitive insurance industry in which insurers have limited liability, face frictional costs in holding capital, and offer coverage over a range of risk classes. We distinguish monoline and multiline industry structures, and provide what we believe are the first propositions indicating the conditions under which each structure is optimal. Markets for which the risks are limited in number, asymmetric or correlated will be served by monoline insurers, whereas markets characterized by a large number of essentially independent risks will be served by many multiline firms, each with a different level of capital. Our results are consistent with the observed structures in the insurance industry, and have implications more broadly for financial services industries.