26.4 Supply and Demand

Supply and Demand on quantity vs price

Figure 26.1: Supply and Demand on quantity vs price

Supply

  • New competition or technology increases the quantity available at a given price

    \(\hookrightarrow\) Shifting curve \(\searrow\)

    • More quantity for same price

  • Higher capital requirement

    \(\hookrightarrow\) Shifting curve \(\uparrow\)

    • Less quantity for same price

Demand

  • Excess capital makes insurance more valuable

    \(\hookrightarrow\) Shifting curve \(\nearrow\)

  • Shock to capital

    \(\hookrightarrow\) Shifting curve \(\swarrow\)

Remark.

  • Curve above is for industry

    • If the industry is well capitalized, its promise to pay claims are worth more and the insurance produce is more valuable and more demand for it

    • If there’s a shock event that reduce the industry’s capital, it will reduce demand for the product

  • Company demand curve will be flatter since customers can go to another company for small changes in price

\(Quantity = f(Price)\)

  • Alternative way to think about this

  • When companies are capital rich, customers want more product for the same price

  • When new competition comes into the market, the same price will have more produce available

Market price = where supply meets demand

  • Difficult to empirically estimate the curves because only the equilibrium is observable

26.4.1 Gron Supply Curve

Plot 4 above in fig. 26.1

The first flat section:

  • There is a minimum price for insurance product

\[\text{Minimum Price} = \text{Expected Losses} + \text{Marginal Expenses}\]

  • Supply is perfectly elastic for a certain quantity, where the supply will increase without an increasing price

The curved section:

  • At certain point firm will require additional capital to support the business, and the price must increase

  • Once price hits a a certain level, profits are enough to cover the additional capital and the supply curve approaches a price asymptotically

  • This is high AE from Goldfard’s perspective

Plot 5 above in fig. 26.1

Shock scenario:

  • Curve would simply shift \(\leftarrow\)

  • Expected loss + marginal expense is still the same

  • Amount of capital the company have before it needs to seek additional capital has changed