RISK MANAGEMENT Essay Example | Topics and Well Written Essays - 1500 words

RISK MANAGEMENT - Essay Example This also means that the insurance market is similar to the goods market, whose demand depends on certain factors. Consumers may fail to cover their lives, vehicles, and health even if doing so is beneficial. An understanding of the factors that affect consumer demand for insurance is essential for both the sellers and buyers of policies. The understanding helps these buyers to make the right decisions at the right time (Williams, Smith, & Young, 1998). Structure of Insurance Markets The market structure of an insurance industry includes the number of sellers and whether they are efficient. This is because the efficiency of a market is directly proportional to its structure (Greene, & Serbian, 1983). There are various market structures that influence the demand for insurance; they include perfect competitive, oligopoly, and monopoly. The perfect competitive market is one that has numerous sellers and buyers, and the insurance companies are free to penetrate and exit the market. This market is characterized by perfect information and standardization of products and prices. This means that insurance buyers have the full knowledge of the market activities such as the types of policies, their prices, and the underwriting guidelines. Buyers in this market have the freedom to purchase the policy they want from any seller because prices are standard. Insurance purchasers also have the freedom to leave one insurer and purchase a policy in another seller’s company when they find out that there are price differentials. The standardization and freedom in this market motivates buyers to purchase insurance policies (Dickson, 1989). A monopoly market, on the other hand, is the one that has a single seller. The seller dictates the policy to provide for the market and the price at which to sell the insurance. Monopolies are inefficient because of their ability to determine the product and the price at which to provide the good. This means that such as insurance market o ffers few choices to buyers in terms of the available policies. Buyers have no freedom to leave the market because they may not find the insurance policy elsewhere. Therefore, insurance buyers in a monopoly market have no freedom in the market; they may only follow the rules of the seller (Woodhouse, 1993). The lack of freedom may discourage buyers from alleviating risks using insurance. An oligopoly market is the one that has few sellers and the products are differentiated from one insurer to the other. Buyers in this market have the freedom to purchase the policy that suits their needs the best. However, since the sellers in the market are few, buyers do not have a wide range of choices. The few choices in this market may motivate some buyers to purchase insurance policies while other may not find the policies that suit their needs (Harrington, & Niehause, 2004). Price of Cover The price of an insurance cover also determines whether a buyer purchases the policy. This is because th e incomes of buyers differ from one buyer to the other. A high price of an insurance policy discourages buyers from purchasing a policy. This is according to the law of demand, which argues that rational consumers prefer goods and services at low prices (Woodhouse, 1993). However, buyers may choose to purchase insurance policies at high prices when benefits are guaranteed. An example of a policy that buyers may purchase at high prices is life insurance. The life insurance policy is the one that covers the whole life of a person, and it is renewable after the death of