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The Formation of Mutual Insurers in Markets with Adverse Selection

Author

Listed:
  • James A. Ligon

    (University of Alabama)

  • Paul D. Thistle

    (University of NevadaLas Vegas)

Abstract

The size distribution of mutual property-liability insurers has a larger proportion of relatively small companies than the size distribution of stock property-liability insurers. Small mutuals are unlikely to offer risk-sharing advantages over conventional insurance, so these firms must offer their members other advantages. This article develops a theoretical model showing that these mutuals may offer advantages over conventional insurance in addressing problems of adverse selection. When adverse selection exists, conventional insurers may coexist with small mutuals. Small mutuals may be strictly preferred by low-risk individuals. The size of the mutuals is limited by asymmetric information problems.

Suggested Citation

  • James A. Ligon & Paul D. Thistle, 2005. "The Formation of Mutual Insurers in Markets with Adverse Selection," The Journal of Business, University of Chicago Press, vol. 78(2), pages 529-556, March.
  • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:2:p:529-556
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    Cited by:

    1. Patricia Born & M. Martin Boyer, 2011. "Claims‐Made and Reported Policies and Insurer Profitability in Medical Malpractice," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 78(1), pages 139-162, March.
    2. Pierre Picard, 2014. "Participating Insurance Contracts and the Rothschild-Stiglitz Equilibrium Puzzle," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(2), pages 153-175, September.
    3. Francesca Barigozzi & Renaud Bourlès & Dominique Henriet & Giuseppe Pignataro, 2017. "Pool size and the sustainability of optimal risk-sharing agreements," Theory and Decision, Springer, vol. 82(2), pages 273-303, February.
    4. Seog S. Hun, 2006. "Limited Competition, Information Asymmetry, and Organizational Forms," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 1(2), pages 1-14, February.
    5. repec:spr:amsrev:v:6:y:2016:i:3:d:10.1007_s13162-016-0083-2 is not listed on IDEAS
    6. Eric Stephens & James R. Thompson, 2015. "Separation Without Exclusion in Financial Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 82(4), pages 853-864, December.
    7. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    8. Georges Dionne & Nathalie Fombaron & Neil Doherty, 2012. "Adverse Selection in Insurance Contracting," Cahiers de recherche 1231, CIRPEE.
    9. Renaud Bourlès & Dominique Henriet, 2012. "Risk-sharing Contracts with Asymmetric Information," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 37(1), pages 27-56, March.
    10. Braun, Alexander & Schmeiser, Hato & Rymaszewski, Przemysław, 2015. "Stock vs. mutual insurers: Who should and who does charge more?," European Journal of Operational Research, Elsevier, vol. 242(3), pages 875-889.

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