MTHEL131 Chapter Notes - Chapter 23: Mutual Organization, Mutual Insurance, Life Insurance
14 Oct 2013
School
Department
Course
Professor
Document Summary
Commercial life insurance companies are classified either as mutual, or stock. Agency theory focuses on incentive conflicts between 1) company owners, 2) company managers, 3) policy owners. Agents are supposed to increase company"s wealth. Stock companies should deal with group insurance, health insurance. Mutual companies should deal with whole-life contracts. Control mechanisms are in place to ensure that management actions do not impose too much cost on shareholders: Means that managers do not bear the financial effects of their decisions. Managers would do things to maximize their own utility (power, prestige, income), which may be inconsistent with best interests of shareholders. In a mutual company, ownership function is merged with policy-owner"s function. The rights of policy owners are more restricted, and upon termination, they have no rights to capital other than their csv. Also creates incentive conflicts stockholders have incentives to increase value of their claims at the expense of policy owners.
