How Do Cost and Regulation Change Loss Control Activities and Insurers' Monitoring?

This study uses game theory to consider the impact of loss control (LC) and monitoring costs on insurers’ monitoring activities and investigate how the level of the insurance premium changes monitoring activities. The main results are as follows. First, a firm always undertakes LC when the LC cost is low. Second, when the insurer can spontaneously choose the level of the insurance premium, the insurer’s incentive to monitor the firm decreases and LC activities will not be promoted, because the cost of an accident can be directly reflected in the level of the insurance premium. In contrast, when the level of the insurance premium is exogenously decided, the insurer’s incentive to monitor the firm increases and LC activities will be promoted, because the cost of accidents cannot be directly reflected in the level of the insurance premium.