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The merits of pooling claims: Mutual vs. stock insurers

Hato Schmeiser and Carolina Orozco-Garcia

Insurance: Mathematics and Economics, 2021, vol. 99, issue C, 92-104

Abstract: This paper identifies combinations of premiums, equity capital contributions, default probabilities, and pool sizes, under which a risk-averse policyholder is indifferent between purchasing insurance coverage with a mutual or a shareholder insurance company. We analyze in a first step the combinations of premiums and equity contributions within a fixed pool size, such that a policyholder is indifferent to either of the two legal forms. In a second step, we include the restriction of a fixed default probability in both the mutual and shareholder insurance companies. In addition, we show that for a given default probability, a determined pool size and fair premiums (i.e., the premium equals the expected indemnity payments), a policyholder in the shareholder company experiences higher utility levels than a policyholder in a mutual insurance company. Hence, a risk-averse policyholder accepts an unfair premium in the shareholder company to obtain the same utility level provided by the mutual company.

Keywords: Risk pooling; Stock and mutual insurers; Insurance demand; Insurance pricing (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.insmatheco.2021.02.002

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Insurance: Mathematics and Economics is currently edited by R. Kaas, Hansjoerg Albrecher, M. J. Goovaerts and E. S. W. Shiu

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