Insurance with Undiversifiable Risk
Some Current Insurance Markets Are Troubled by the Presence of Systematic Risk Or by the Inability of the Parties to Specify the Distribution for Aggregate Loss. Such Circumstances Partly Characterise the Topical "Liability Insurance Crisis". We Compare the Performance of Alternative Vehicles for Risk Sharing Under These Circumstances. Specifically, We Show That Mutals Appear to Outperform Stock Insurance Companies When There Is Undiversifiable Risk. These Results Represent an Extension of Marshall (1974). While the Story Is Told in Terms of Stocks and Mutuals, the Real Issue Is Not the Form of Organisation But the Risk Bearing Package Typically Offered by These Alternative Structures. Other Types of Organisation May Offer Similar Packages (E.G. the Reciprocal) and It Is Possible for the Individual to Replicate the Effects of Mutual Insurance on His/Her Own Account (Homemade Mutualisation). Though It Is Not a Necessary Conclusion of This Paper, It May Be That the Mutual Or Reciprocal Has a Comparative Advantage in Bundling the Preferred Risk Bearing Package.
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|Date of creation:||1987|
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