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Insurance with Undiversifiable Risk: Contract Structure and Organizational Form of Insurance Firms

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  • Doherty, Neil A
  • Dionne, Georges

Abstract

Previous explanations of the contract choice and organizational form of insurance firms do not explain, by themselves, the recent proliferation of mutuals and new contract designs. We first present risk-bearing arguments to address these phenomena. We present two forms of insurance. The first is a conventional transfer of risk whereas the second decomposes risk between idiosyncratic and nonidiosyncratic. We show that the latter form leads to more active trade in insurance markets with correlated exposures. Moreover, the decomposed form dominates the simple transfer. These results qualify and extend the work of Borch (1962) and Marshall (1974). Market responses to the recent "liability insurance crisis" are compatible with these predictions. Copyright 1993 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 6 (1993)
Issue (Month): 2 (April)
Pages: 187-203

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Handle: RePEc:kap:jrisku:v:6:y:1993:i:2:p:187-203

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Web page: http://www.springerlink.com/link.asp?id=100299

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Cited by:
  1. Nell, Martin & Richter, Andreas, 2002. "Improving risk allocation through cat bonds," Working Papers on Risk and Insurance 10, University of Hamburg, Institute for Risk and Insurance.
  2. Capitanio, F. & Adinolfi, Felice & Di Pasquale, J. & Contò, F., 2013. "¿Cuáles son los determinantes de la demanda de seguros agrícolas en Italia?," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 13(1).
  3. J. David Cummins & Georges Dionne & Robert Gagné & Abdelhakim Nouira, 2006. "Efficiency of Insurance Firms with Endogenous Risk Management and Financial Intermediation Activities," Cahiers de recherche 0616, CIRPEE.
  4. Bourlès, Renaud, 2007. "On the Emergence of Private Insurance in Presence of Mutual Agreements," MPRA Paper 5821, University Library of Munich, Germany.
  5. Nell, Martin & Richter, Andreas, 2004. "Catastrophic events as threats to society: Private and public risk management strategies," Working Papers on Risk and Insurance 12, University of Hamburg, Institute for Risk and Insurance.
  6. J. David Cummins & Georges Dionne & Robert Gagné & Abdelhakim Nouira, 2008. "The Costs and Benefits of Reinsurance," Cahiers de recherche 08-04, HEC Montréal, Institut d'économie appliquée.
  7. Kleffner, A. E. & N. A. Doherty, 1994. "The Effect of Costly Risk Bearing on Insurers' Supply Decisions," Working Papers 022, Risk and Insurance Archive.
  8. Martin Boyer & Karine Gobert, 2009. "Professional Liability Insurance Contracts: Claims Made Versus Occurrence Policies," Cahiers de recherche 09-03, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  9. Kunreuther, Howard & Meszaros, Jacqueline & Hogarth, Robin M. & Spranca, Mark, 1995. "Ambiguity and underwriter decision processes," Journal of Economic Behavior & Organization, Elsevier, vol. 26(3), pages 337-352, May.
  10. F. Barigozzi & R. Bourles & D. Henriet & G. Pignataro, 2011. "Improving Compliance With Preventive Care: Cooperation in Mutual Health Insurance," Working Papers wp765, Dipartimento Scienze Economiche, Universita' di Bologna.
  11. Geoffroy Enjolras & Robert Kast, 2008. "Using participating and financial contracts to insure catastrophe risk: Implications for crop risk management," Working Papers 08-01, LAMETA, Universtiy of Montpellier, revised Jan 2008.
  12. Harrington, Scott E. & Danzon, Patricia M. & Epstein, Andrew J., 2008. ""Crises" in medical malpractice insurance: Evidence of excessive price-cutting in the preceding soft market," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 157-169, January.
  13. Anne E. Kleffner & Neil A. Doherty, 1994. "The Effect Of Costly Risk Bearing On Insurers' Supply Decisions," Risk and Insurance 9407005, EconWPA.
  14. Bender, Klaus & Richter, Andreas, 2002. "Optimales Vertragsdesign bei moralischem Risiko in der Rückversicherung," Working Papers on Risk and Insurance 9, University of Hamburg, Institute for Risk and Insurance.
  15. Geoffroy Enjolras & Robert Kast, 2012. "Combining participating insurance and financial policies: A new risk management instrument against natural disasters in agriculture," Agricultural Finance Review, Emerald Group Publishing, vol. 72(1), pages 156-178, March.
  16. Georges Dionne & Nathalie Fombaron & Neil Doherty, 2012. "Adverse Selection in Insurance Contracting," Cahiers de recherche 1231, CIRPEE.
  17. Fabrice Roth, 1998. "Structures de propriété, pouvoir discrétionnaire managérial et choix d'activité dans l'assurance dommages en France," Working Papers CREGO 0980301, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
  18. Laux, Christian & Muermann, Alexander, 2010. "Financing risk transfer under governance problems: Mutual versus stock insurers," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 333-354, July.
  19. José Penalva, 2003. "Implications of dynamic trading for insurance markets," Economics Working Papers 720, Department of Economics and Business, Universitat Pompeu Fabra.
  20. Laux, Christian & Muermann, Alexander, 2006. "Mutual versus stock insurers: Fair premium, capital, and solvency," CFS Working Paper Series 2006/26, Center for Financial Studies (CFS).

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