Reciprocal insurance: a case of supply created by demand
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.
Keywords
Citation
Venezian, E.C. (2005), "Reciprocal insurance: a case of supply created by demand", Journal of Risk Finance, Vol. 6 No. 5, pp. 404-415. https://doi.org/10.1108/15265940510633479
Publisher
:Emerald Group Publishing Limited
Copyright © 2005, Emerald Group Publishing Limited