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The merits of pooling claims: Mutual vs. stock insurers

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  • Schmeiser, Hato
  • Orozco-Garcia, Carolina

Abstract

This paper identifies combinations of premiums, equity capital contributions, default probabilities, and pool sizes, under which a risk-averse policyholder is indifferent between purchasing insurance coverage with a mutual or a shareholder insurance company. We analyze in a first step the combinations of premiums and equity contributions within a fixed pool size, such that a policyholder is indifferent to either of the two legal forms. In a second step, we include the restriction of a fixed default probability in both the mutual and shareholder insurance companies. In addition, we show that for a given default probability, a determined pool size and fair premiums (i.e., the premium equals the expected indemnity payments), a policyholder in the shareholder company experiences higher utility levels than a policyholder in a mutual insurance company. Hence, a risk-averse policyholder accepts an unfair premium in the shareholder company to obtain the same utility level provided by the mutual company.

Suggested Citation

  • Schmeiser, Hato & Orozco-Garcia, Carolina, 2021. "The merits of pooling claims: Mutual vs. stock insurers," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 92-104.
    • Handle: RePEc:eee:insuma:v:99:y:2021:i:c:p:92-104
    DOI: 10.1016/j.insmatheco.2021.02.002
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    References listed on IDEAS

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    Cited by:

    1. Markus Huggenberger & Peter Albrecht, 2022. "Risk pooling and solvency regulation: A policyholder's perspective," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(4), pages 907-950, December.

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