The Formation of Mutual Insurers in Markets with Adverse Selection

James A. Ligon and Paul D. Thistle
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James A. Ligon: University of Alabama
Paul D. Thistle: University of NevadaLas Vegas

The Journal of Business, 2005, vol. 78, issue 2, 529-556

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.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:78:y:2005:i:2:p:529-556

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