Abstract - Mutual versus Stock Insurers: Fair Premium, Capital, and Solvency

Mutual and stock insurers are different forms for organizing risk sharing: policyholders and owners are separated in a stock insurer, while they coincide for a mutual. This distinction is relevant to raising capital, selling policies, and sharing risk in the presence of financial distress. Up-front capital is necessary to offer insurance at a fair premium for a stock insurer, but not for a mutual. In the presence of an owner-manager conflict, holding capital is costly. Free rider and commitment problems limit the degree of capitalization for a stock insurer. The mutual form, by tying sales of policies to the provision of capital, can overcome these problems at the potential cost of less diversified owners.
(joint work with Alexander Muermann, Wharton School)

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