Tomas Philipson and George Zanjani
It is often argued that the existence of nonprofit and consumer-owned enterprises arises from asymmetric information and incentive conflicts between producers and consumers. When quality is unobservable and costly to monitor, alternatives to proprietary ownership may be desirable if they can be utilized to limit opportunistic behaviour by producers (see, for examples, Hansmann, 1996; Weisbrod, 1988).
Because of a relatively long gap between payment and product delivery, the insurance product is thought to be especially vulnerable to opportunistic actions that jeopardize company solvency. That is, producers are tempted to take actions that increase profits but threaten product quality by making it less likely that the firm will be able to meet its obligations. Such behaviour may take a variety of forms. For example, companies controlled by shareholders might speculate with the company’s assets, neglect costly risk management activities, or even distribute excessive amounts to shareholders through dividends. Nonprofit and mutual firms, however, are not affected by a profit motive. Nonprofits cannot distribute profits to owners, and the owners of mutuals are the consumers themselves. Because of this, management is argued to act in the interest of the policyholder, safeguarding the company’s solvency. 1
Thus, non-proprietary organizations would seem to have significant advantages in the production of insurance, especially for contracts where the gap between payment and final delivery is long, such as life insurance, long-term care insurance, renewable health insurance, and workers’ compensation insurance. Yet, non-proprietary firms are the minority players in all major segments of the US insurance industry and do not appear to have market shares that vary across markets in a manner that would support this theory. In 1997, mutuals had a market share of roughly 35 per cent in both the property-casualty and life-health industries, and nonprofits accounted for about 35 per cent of Human Maintenance Organization (HMO) premiums. 2 Furthermore, coexistence of stock and non-proprietary firms has persisted throughout US history (see, for example, Zanjani, 2000), spanning a variety of different economic situations and regulatory regimes.