Faculty of Economics and Business Administration Publications Database

Who Benefits from Building Insurance Groups? A Welfare Analysis based on Optimal Group Risk Management

Schlütter, Sebastian
Volume: 37
Pages: 571 - 593
Month: July
Link External Source: Online Version
Year: 2012
Keywords: Insurance groups; Insurer default risk; Insurance pricing; Consumer protection

This paper compares the shareholder-value-maximizing capital structure and pricing policy of insurance groups against that of stand-alone insurers. Groups can utilise intra-group risk diversification by means of capital and risk transfer instruments. We show that using these instruments enables the group to offer insurance with less default risk and at lower premiums than is optimal for stand-alone insurers. We also take into account that shareholders of groups could find it more difficult to prevent inefficient overinvestment or cross-subsidisation, which we model by higher dead-weight costs of carrying capital. The tradeoff between risk diversification on the one hand and higher dead-weight costs on the other can result in group building being beneficial for shareholders but detrimental for policyholders.