The Corporate Demand for Insurance: A Strategic Perspective

Abstract

The purpose of this paper is to discuss the possibility that decisions on corporate insurance purchases may have a strategic dimension. The conventional literature has focused on the ability of insurance to add value to the firm by limiting the impact of risk on risk averse stakeholders or reducing the cost of such risk. The key argument in this paper is that, under certain circumstances, the corporate demand for insurance may be motivated by a company's strategic decisions on output and price risk. Most real world markets are characterised by small numbers of relatively large firms which compete with each other strategically. By focu-sing on such oligopolistic markets, we reveal that this interdependency between firms means that insurance and risk management can also have a strategic consequence. The strategic behaviour of the firm may influence risk management in general, and the corporate purchase of insurance in particular, in three main ways: first, the strategic nature of competition may provide an incentive for even risk neutral firms to control risk; secondly the firm's risk control decisions cannot be made in isolation but will depend on the actions of its rivals, and thirdly insurance (as opposed to other risk control mechanisms) may play a role in facilitating cooperation or coordination between competing firms for their mutual benefit.