Christian Laux () (Frankfurt University and CFS) Alexander Muermann () (University of Pennsylvania, The Wharton School)
Abstract
Mutual insurance companies and stock insurance companies are different forms of organized risk sharing: policyholders and owners are two distinct groups in a stock insurer, while they are one and the same in a mutual. This distinction is relevant to raising capital, selling policies, and sharing risk in the presence of financial distress. Up-front capital is necessary for a stock insurer to offer insurance at a fair premium, but not for a mutual. In the presence of an ownermanager conflict, holding capital is costly. Free-rider and commitment problems limit the degree of capitalization that a stock insurer can obtain. The mutual form, by tying sales of policies to the provision of capital, can overcome these problems at the potential cost of less diversified owners.
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Publisher Info
Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2006/26.
Length: 37 pages Date of creation: 07 Dec 2006 Date of revision: Handle: RePEc:cfs:cfswop:wp200626
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