Agency Theory and Participating Policy Usage: Evidence from Stock Life Insurers

41 Pages Posted: 9 Aug 2001

See all articles by Sudha Krishnaswami

Sudha Krishnaswami

University of New Orleans - College of Business Administration

Steven W. Pottier

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Date Written: January 2001

Abstract

Extant literature demonstrates that participating policies mitigate shareholder-policyholder incentive conflicts in stock insurance firms. However, extending the argument in Mayers and Smith (1994), we formally show that participating policies also exacerbate the shareholder-manager incentive conflicts in stock insurance firms. In this paper, we test whether hypotheses derived from agency theory explain the usage of participating life insurance policies by stock insurers. Our results are consistent with the argument that participating policy usage is dictated by the trade-off between the mitigation of the contracting costs of risk shifting and underinvestment, and the exacerbation of the incentive conflicts between managers and shareholders.

Keywords: agency theory, participating policies, risk shifting, underinvestment, managerial discretion

JEL Classification: G32, L22, G22

Suggested Citation

Krishnaswami, Sudha and Pottier, Steven W., Agency Theory and Participating Policy Usage: Evidence from Stock Life Insurers (January 2001). Available at SSRN: https://ssrn.com/abstract=278835 or http://dx.doi.org/10.2139/ssrn.278835

Sudha Krishnaswami (Contact Author)

University of New Orleans - College of Business Administration ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States
504-280-6488 (Phone)
504-280-6397 (Fax)

HOME PAGE: http://www.uno.edu/~skrishna

Steven W. Pottier

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-3786 (Phone)
706-542-4295 (Fax)

HOME PAGE: http://www.terry.uga.edu/insurance/pottier.html

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