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Stock vs. Mutual Insurers: Who Should and Who Does Charge More?
Journal
European Journal of Operational Research
ISSN
0377-2217
ISSN-Digital
1872-6860
Type
journal article
Date Issued
2015-05-01
Author(s)
Abstract
We contribute to the literature by developing a normative theory of the relationship between stock and mutual insurers based on a contingent claims framework. To consistently price policies provided by firms in these two legal forms of organization, we extend the work of Doherty and Garven (1986) to the mutual case, thus ensuring that the formulae for the stock insurer are nested in our more general model. This set-up allows us to separately consider the ownership and policyholder stakes included in the mutual insurance premium and explicitly takes into account the right to charge additional premiums in times of financial distress, restrictions on the ability of members to realize the value of their equity stake, as well as relevant market frictions. Based on a numerical implementation of our model, we are able to show that, for the premiums of stock and mutuals insurers to be equal, the latter would need to hold comparatively less equity capital. We then evaluate panel data for the German motor liability insurance sector and demonstrate that observed premiums are not consistent with our normative findings. The combination of theory and empirical evidence is not compatible with full competition in insurance markets and suggests that policies offered by stock insurers are overpriced relative to policies of mutuals. Consequently, we suspect considerable wealth transfers between the stakeholder groups.
Language
English
Keywords
Insurance Company
Insurance Pricing
Legal Form of Organization
Contingent
Claims Framework
Claims Framework
Hausman-Taylor Estimator
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
242
Number
3
Start page
875
End page
889
Pages
15
Subject(s)
Division(s)
Eprints ID
173043