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Nash equilibrium premium strategies for push–pull competition in a frictional non-life insurance market

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Two insurance companies I 1 ,I 2 with reserves R 1 (t),R 2 (t) compete for customers, such that in a suitable stochastic differential game the smaller company I 2 with R 2 (0)<R 1 (0) aims at minimizing R 1 (t)−R 2 (t) by using the premium p 2 as control and the larger I 1 at maximizing by using p 1 . The dependence of reserves on premia is derived by modelling the customer's problem explicitly, accounting for market frictions V, reflecting differences in cost of search and switching, information acquisition and processing, or preferences. Assuming V to be random across customers, the optimal simultaneous choice p 1 ,p 2 of premiums is derived and shown to provide a Nash equilibrium for beta distributed V. The analysis is based on the diffusion approximation to a standard Cramér–Lundberg risk process extended to allow investment in a risk-free asset.

Original languageEnglish
JournalInsurance: Mathematics and Economics
Pages (from-to)92-100
Number of pages9
Publication statusPublished - 1 Jul 2019

    Research areas

  • Beta distribution, Diffusion approximation, Exit problem, Market friction, Nash equilibrium, Saddle point, Stochastic differential game

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