Academic journal article Journal of Risk and Insurance

Managerial Discretion, Regulation, and Stock Insurer Ownership Structure

Academic journal article Journal of Risk and Insurance

Managerial Discretion, Regulation, and Stock Insurer Ownership Structure

Article excerpt


The insurance industry employs a broad range of ownership structures. Included are stock companies, which employ the standard corporate form; mutuals and reciprocals, which (like cooperatives) merge customer and ownership functions; and Lloyd's associations, which supply insurance through coalitions of individual underwriters. Managerial control mechanisms differ across these ownership structures; for example, stock company managers can receive stock-based incentive compensation, whereas mutual managers cannot. As a result, the discretion authorized management also differs. Variation in managerial decision-making authority implies that different ownership structures have a comparative advantage in different activities.

Mayers and Smith (1988) test this managerial discretion hypothesis employing cross-sectional data; they document variation in product specialization across ownership structures in the property-liability insurance industry. Lamm-Tennant and Starks (1993) also examine activity choices using panel data. Their evidence indicates that, compared to mutual insurers, stocks write more business in lines with higher underwriting risk. Yet, since taxes and regulation vary across ownership structures as well as across states in which the firms do business, it is unclear how much of this documented variation is attributable to the control-related arguments of the managerial discretion hypothesis.

This article focuses on common stock insurers, which vary widely in ownership structure. At one extreme, the equity is owned by a mutual insurer; at the other, by a single individual. We argue that the analysis of managerial control problems of mutuals also applies to stock companies owned by mutuals, and that the incentives associated with Lloyd's are similar to those for closely-held stock companies. By employing more detailed information on the ownership of stock companies than heretofore has been used, we are better able to control for significant components of regulatory and tax variation. For example, minimum capital requirements and tax rules vary between mutual and stock companies.(1) Because states vary widely in regulation and tax policies, we also control for the states in which our sample insurers do business.

This article thus extends our understanding of ownership structure in the insurance industry in three primary ways: First, by distinguishing among widely-held, closely-held, and mutual-owned and association-owned stock companies, we exploit more texture in the ownership data than previous studies, thereby deriving a richer understanding of this industry. Second, by focusing on variation among stocks, we better control for potential effects of taxes and regulation. Third, our use of empirical methods such as seemingly unrelated regressions and multinomial logistic regressions provide a more precise set of metrics for explaining the determinants of ownership structure.

Our evidence indicates that an insurer's activity choices are significant determinants of ownership structure. In particular, the activities of stocks owned by mutuals are more like those of mutuals than widely-held stocks. Our evidence also indicates that ownership structure varies across states (presumably because of regulatory differences). We find no evidence of a life cycle in ownership structure; none of the variation appears related to company age.

In the next section, we classify ownership of stock insurers and discuss the differences between widely-held stocks, closely-held stocks, stocks owned by mutual insurers, and stocks owned by associations. Then, we describe our data and present evidence on the variation of production activities by ownership class. Our conclusions are presented in the last section.

Analysis of Insurer Ownership Structure

Three important functions in any insurer are those of the managers, the owner/risk-bearers, and customers. The managers are the decision-makers and administrators who quote rates, market policies, and administer claims. …

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