Financing Risk Transfer under Governance Problems: Mutual versus Stock Insurers
39 Pages Posted: 16 Jun 2006 Last revised: 4 Sep 2009
Date Written: June 16, 2009
Mutual insurance companies and stock insurance companies are different forms of organized risk sharing: policyholders and owners are two distinct groups in a stock insurer, while they are one and the same in a mutual. This distinction is relevant to raising capital and selling policies in the presence of frictional cost of capital. Free-rider and commitment problems in a stock insurer limit shareholders' compensation for the frictional cost and therefore the level of capital that can be raised. By tying sales of policies to the provision of capital, the mutual form can overcome these problems at the cost of less diversified owners.
Keywords: ownership structure, insurance, owner-manager conflict, capital, default
JEL Classification: G22, G32
Suggested Citation: Suggested Citation