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Mutual or stock insurance: Solidarity in the face of insolvency

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  • Debora Zaparova

Abstract

This paper analyzes the choice of the insurer, mutual or stock, for a heterogeneous population aware of insurers’ probability of insolvency. The stock insurer sets individualized premiums and manages his probability of insolvency by means of a premium loading, in contrast to the mutual insurer who sets an average premium and allows a possibility to adjust the premium level ex-post. We show that under some conditions mutual insurer is optimally preferred by the entire population of high and low risk agents. The existence of pooling equilibrium depends on the relative weight of each group of risks in the population, and on the size of the risk loading. For a sufficiently small group of low risk agents, an increase in the risk loading provides an incentive to pool their risk with the high-risk agents through the mutual agreement.

Suggested Citation

  • Debora Zaparova, 2020. "Mutual or stock insurance: Solidarity in the face of insolvency," Working Papers of BETA 2020-06, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2020-06
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    File URL: http://beta.u-strasbg.fr/WP/2020/2020-06.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    mutualization; risk loading; insolvency; symmetrical information; high risks.;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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