Ownership Structure and Control: Property-Casualty Insurer Conversion to Stock Charter

42 Pages Posted: 28 Nov 2000

See all articles by David Mayers

David Mayers

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Clifford W. Smith

Simon Graduate School of Business, University of Rochester

Multiple version iconThere are 2 versions of this paper

Date Written: October 18, 2000

Abstract

We examine 98 property-casualty insurance companies that convert to stock charter from a mutual or reciprocal form of organization. Our evidence shows converting firms have low surplus, significant growth in premium income, and draw down on their non-financial assets in years prior to conversion. Following conversion there is significant growth in assets and the number of States licensed. We also show by examining evidence on the riskiness of firms' operations that converting companies began operating like stock companies prior to conversion. Thus, our evidence suggests there can be important costs associated with the operation of a mutual or reciprocal insurance company. These costs can include the opportunity costs associated with foregone investments arising because of higher incremental capital costs inherent in the mutual or reciprocal forms of ownership. There also is a cost disadvantage if a mutual or reciprocal is operating in activities more appropriate for the stock ownership form. These costs can in particular circumstances offset the advantage mutual ownership affords in controlling incentives to transfer wealth from policyholders to equityholders.

Suggested Citation

Mayers, David and Smith, Clifford W., Ownership Structure and Control: Property-Casualty Insurer Conversion to Stock Charter (October 18, 2000). Simon School of Business Working Paper No. FR 00-15. Available at SSRN: https://ssrn.com/abstract=251956 or http://dx.doi.org/10.2139/ssrn.251956

David Mayers (Contact Author)

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States
909-787-3443 (Phone)
909-787-2933 (Fax)

Clifford W. Smith

Simon Graduate School of Business, University of Rochester ( email )

Carol Simon Hall 3-202C
Rochester, NY 14627
United States
585-275-3217 (Phone)
585-442-6323 (Fax)

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