Mutuality and the Underwriting Cycle: Theory with Evidence from the Pennsylvania Fire Insurance Market, 1873-1909

This paper studies the connection between risk-sharing and organizational form. It models the organizational form decision as a trade-off between the superior capital market access of the stock form and a regulatory or agency advantage held by the mutual form. When capital is expensive, consumers will substitute away from paying investors to supply risk-bearing capital and toward bearing more risk through mutual companies. The theory is supported with evidence from the Pennsylvania fire insurance market in 1874-1909. During this period, use of the mutual form moved in tandem with the insurance underwriting cycle. ∗I thank Tobias Adrian, Neil Doherty, Arturo Estrella, Charlie Himmelberg, Darius Lakdawalla, Hamid Mehran, and Joshua Rosenberg. Errors are mine. The views expressed in this article are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.