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Reciprocal insurance: a case of supply created by demand

Reciprocal insurance: a case of supply created by demand Purpose – The purpose of this study is to determine the characteristics of the equilibrium between demand and supply for a reciprocal insurance firm. Design/methodology/approach – The model developed assumes a fixed number of individuals with identical characteristics and of constant absolute risk aversion who can choose between remaining self‐insured or forming a reciprocal insurer to serve their needs. Findings – The results show that under those conditions the individuals either remain self‐insured or form a reciprocal and buy full insurance. Which of the two decisions will be made depends on the relation between the number of members of the reciprocal and the expenses that will be incurred by that entity. Research limitations/implications – Most alternative models of insurance demand imply that, in the presence of transaction costs, partial insurance is the rule. Practical implications – The major practical implication is that there can be serious agency problems in the management of reciprocals if attorneys‐in‐fact have influence over their salaries, since they may be able to increase their private welfare at the expense of that of the policyholders. Originality/value – The model is new and its practical implications have not been discussed previously. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

Reciprocal insurance: a case of supply created by demand

Emilio C. Venezian
The Journal of Risk Finance , Volume 6 (5): 12 – Dec 1, 2005
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References (12)

Publisher
Emerald Publishing
Copyright
Copyright © 2005 Emerald Group Publishing Limited. All rights reserved.
ISSN
1526-5943
DOI
10.1108/15265940510633479
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this study is to determine the characteristics of the equilibrium between demand and supply for a reciprocal insurance firm. Design/methodology/approach – The model developed assumes a fixed number of individuals with identical characteristics and of constant absolute risk aversion who can choose between remaining self‐insured or forming a reciprocal insurer to serve their needs. Findings – The results show that under those conditions the individuals either remain self‐insured or form a reciprocal and buy full insurance. Which of the two decisions will be made depends on the relation between the number of members of the reciprocal and the expenses that will be incurred by that entity. Research limitations/implications – Most alternative models of insurance demand imply that, in the presence of transaction costs, partial insurance is the rule. Practical implications – The major practical implication is that there can be serious agency problems in the management of reciprocals if attorneys‐in‐fact have influence over their salaries, since they may be able to increase their private welfare at the expense of that of the policyholders. Originality/value – The model is new and its practical implications have not been discussed previously.

Journal

The Journal of Risk Finance – Emerald Publishing

Published: Dec 1, 2005

Keywords: Insurance; Economics; Supply; Demand; Economic equilibrium

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