Fisher Center for Real Estate and Urban Economics

We study a competitive multiline insurance industry, in which insurance companies with limited liability choose which insurance lines to cover and the amount of capital to hold. The results are developed under the realistic assumptions that insurers face friction costs in holding capital and that the losses created by insurer default are shared among policyholders following an ex post, pro rata, sharing rule. We characterize the situations in which monoline and multiline insurance structures will be optimal. Markets characterized by a large number of essentially independent risks will be served by multiline firms. Markets for which the risks are asymmetric or correlated may best served by monoline insurers. The results are directly relevant to such catastrophe lines as bond and mortgage default insurance, and may be applicable more generally to industries in which risky activities can be carried out by either monoline or conglomerate entities. We illustrate the results with examples.