What insurance industry characteristics resemble a cartel? Here’s everything you need to know about the cartelisation of the insurance industry. In times past, the insurance industry was characterised by the coexistence of stock and mutual insurers who come together to adopt a price and market agreement that resembles a cartel.

Just like producers of other businesses, insurers of the same line may seek to increase returns by cooperation. If such cooperation is explicit and conducted to increase collective profits by raising the market price, the association is usually referred to as a cartel.

The formation of cartels is an alternative to mergers since it may reduce competition. However, in the United States, virtually all cartels, regardless of their line of business, is illegal by virtue of American antitrust laws. However, there were three different cartel strategies used by insurance companies in the past.

3 Cartel Strategies Used By Insurance Companies

1. Stipulation of Price

The first strategy involved stipulating prices for the member companies to be charged from customers. However, since insurance products are never perfectly homogeneous and since different customer groups tend to show different willingness to pay, a price structure must be created, meaning that a number of price classes must be created.

Note that this creation of price classes will however demand information and negotiation among the member companies, meaning that costs will be inflicted on these companies. Also note that this strategy tend to be more or less associated with a severe difficulty of implementation, namely cheating among the member companies.

Since it may be profitable for individual member companies to secretly offer lower prices to competitors than stipulated in the price agreement and thereby attract customers from other member companies, cheating and internal conflicts have been among the main determinants of cartel breakdown.

2. Creating a Market Division Agreement

The second strategy involved creating a market division agreement. However, the incentives for cheating are then greatly reduced since no member company can gain output volumes by price – cutting. This strategy more or less presupposes that inspection of output volumes is performed.

3. Assigning Buyer to a Single Seller

The third strategy still involves creating a certain form of market division agreements, namely to assign each buyer to a single seller. By this strategy, costs associated with inspection are avoided since the short – run incentives for cheating are eliminated.

However it is still pervaded with other difficulties. For one, the fortunes of the various sellers will differ over time since one seller’s customers may grow substantially, while another seller’s customers exit the market.

Why Insurance Companies Aim to Achieve Using the Strategies Above

Howbeit, insurance cartels frequently leverage more than one of the above strategies to achieve various purposes. The first purpose was to geographically divide markets between insurers. Working for this purpose means that each buyer is assigned to a single seller, corresponding to the third strategy.

The second purpose was to standardise premium rates, corresponding to the first strategy stated above. The third purpose was to standardise insurance conditions. However, it is pertinent of note that if insurance cartels standardise both premium rates and insurance conditions, it not only recognizes price classes previously employed by the member companies, but creates price classes.

The fourth purpose was to standardise how business was acquired. Finally, the fifth purpose was to divide risks between insurers. Working for this purpose corresponds to the cartelisation second strategy. According to economists, standardisation of premium rates and insurance conditions has been the most common main purposes of insurance cartels in times past.

Cartelisation may reduce the efficiency of insurance markets, meaning that it may reduce the volumes of traded insurance. However, in price cartels, the member companies determine prices without regard to production costs. This entails that premium rates are potentially elevated to increase insurers’ revenues on the expense of policyholders, in effect reducing the efficiency of markets.

Advantages of Cartels in the Insurance Industry

  1. Assurance of Profits

Since prices charged by cartels are more than the cost of production and distribution, members are assured of a reasonable profit margin. Just like it was stated above, price cartel companies determine prices without regard to production costs and it always entails that premium rates are potentially elevated to increase insurers’ revenues on the expense of policyholders, in effect reducing the efficiency of markets.

  1. Risk and rate Reduction

In insurance literature, setting high premium rates for novel physical hazards has been conceived as a standard response to uncertainty. By cartelisation, different insurers’ knowledge on insured risks may be synthesised. Thereby uncertainty of risk assessments is reduced. Cartelisation may under such circumstances benefit also policyholders since it allows for premium rate reductions

  1. Monopoly Power

Also since cartels restrict competition, they are able to enjoy monopoly power. Products can be sold at high prices to maximize profits. In addition, different prices can be charged in different markets based on the degree of monopoly.

  1. Boost Confidence

In insurance, it is important that policyholders hold confidence in insurers’ ability to survive. If there are failures among insurers, this confidence may be damaged. Policyholders may then become less inclined to procure insurance cover, reducing the premium incomes of the remaining insurers.

According to reports, the main objective of insurance cartels has been to preserve and justify the policyholders’ confidence in insurers’ ability to survive and settle future claims when damages occur.

  1. Marketing Economies

Since goods are advertised on a common platform, competitive advertising is avoided. Since there is bulk buying of advertising space and time in media, the cost of advertising is also relatively less. Also since the cartel undertakes the – responsibility of marketing the products, each member company is free to focus on client satisfaction and work to achieve efficiency and cost reduction.

Disadvantages of Cartels in the Insurance Industry

  1. Lack of Stability

Have it in mind that cartels are voluntary associations and do not have complete control over members. Any member or members may exit a cartel any time if they feel that their interests are not being served. Therefore they are weak and lack stability.

  1. Hard to Manage

Cartels are potentially difficult to manage. To realise why this is so, the importance for cartel agreements of industry concentration and cartel concentration must be taken into account. Also note that the incentives for cheating increase with the number of sellers and with the number of member companies, potentially causing price – cutting.

  1. Inability to Stabilize Demand

Cartels have proved ineffective in preventing fluctuations in demand especially in the property insurance sector. They have not been able to stabilize demand to a great extent. Also, there is no incentive for efficiency. As cost plus pricing is followed, member units are assured of profits. Firms lack the incentive to improve efficiency and reduce costs.

  1. Establishment of Monopoly

Just like we already know, cartels lead to creation of monopoly. And since monopolies tend to affect the interest of insurance buyers by resorting to restricting output, creating artificial scarcities, producing low quality insurance and premium products and selling them at high cost, lack of innovation etc.

  1. Creation of Excess Capacity

Cartels are also potentially difficult to maintain under economic downturns since such new circumstances create new opportunities for cheating. Also cartels are vulnerable to unanticipated economic shocks and very rapid growth, while they more effectively manage normal economic fluctuations.

But during boom periods, membership of the cartel would increase, and pooling of information among cartel companies becomes more expensive the greater the number of member companies. Also have it in mind that it becomes more difficult to maintain unanimity of intent when the number of cartel members increases.


Despite a competitive market structure, the insurance industry in times past has traditionally set prices through cartel – like rating bureaus and has been subjected to pervasive state rate regulation. However, during these periods, the combination of state regulation, cartel pricing, and other legal peculiarities resulted in the use of an inefficient sales technique, supply shortages, and over – capitalization.

However, in recent times, the insurance industry have moved away from rate regulation and cartel pricing to open competition, as a means of eliminating prevailing performance problems. Also note that The Organization for Economic Cooperation and Development (OECD) has made the detection and prosecution of cartels one of its primary policy objectives.

In doing so, it has identified four major categories that define how cartels conduct themselves: price – fixing, output restrictions, market allocation, and bid – rigging (the submission of collusive tenders).

Solomon. O'Chucks