The impact of improved information gathering processes on the organizational form and growth of insurers

Abstract This paper addresses the impact of improved data analytics on the size and scope of an insurance firm when access to information is costly. The paper examines the case where policyholders have private and correlated information about the loss they suffered. When individuals have limited abilities, designing complete contracts becomes very complex and demanding. Fortunately, combining an intelligent organizational design (i.e., an informational hierarchy) and improved data analytics helps reduce the effective complexity of insurance contracts. As a result, better information gathering processes allow insurers to (1) reduce their overhead by reducing the number of middle managers, (2) increase their size, or (3) increase their scope.