Reciprocal insurance: a case of supply created by demand

Emilio C. Venezian (Rutgers University, New Brunswick, New Jersey, USA)

Journal of Risk Finance

ISSN: 1526-5943

Publication date: 1 December 2005



The purpose of this study is to determine the characteristics of the equilibrium between demand and supply for a reciprocal insurance firm.


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.


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.


The model is new and its practical implications have not been discussed previously.



Venezian, E. (2005), "Reciprocal insurance: a case of supply created by demand", Journal of Risk Finance, Vol. 6 No. 5, pp. 404-415.

Download as .RIS



Emerald Group Publishing Limited

Copyright © 2005, Emerald Group Publishing Limited

Please note you might not have access to this content

You may be able to access this content by login via Shibboleth, Open Athens or with your Emerald account.
If you would like to contact us about accessing this content, click the button and fill out the form.
To rent this content from Deepdyve, please click the button.