The Market Pricing of Mutual Insurance
A mutual insurance firm is a firm whose stockholders are the bearers of the insurance contracts. Insurance is then viewed as a collective (pooled) process of persons paying a fixed (or variable, contingent) amount monthly (the premium) and seeking protection against claims that may occur to any one of them. Traditionally, the pricing of mutual insurance arrangements, insurance pools etc. have been priced using essentially an expected utility framework as well as using social principles such â€œborrowing among friendsâ€ , individual balance sensitive premiums and their likes. The purpose of this paper is to consider such a problem from a financial markets perspective and provide a market price for mutual insurance by linking financial and real markets through the mutual insurance firmâ€™s policies. Such a framework, appropriately tailored to financial markets activities can be used to securitize mutual insurance and thereby tap financial markets for the significant financial resources they can provide. Such an approach is in tune with the recent approach to pricing insurance contracts through financial (options based) products, allowing in some cases insurance firms to act as intermediaries to financial markets rather than sustain the risks insurance contracts imply.
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