Stock or mutual: does ownership influence risk?

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Stock or mutual: does ownership influence risk?

Terri Goveia on May 11, 2011

Does it matter who owns an insurance company–customers or stockholders–when it comes to business and investment risk? It does, but it also depends how you look at it, say U.S.-based risk researchers.

Ownership structures have a “significant” impact on organizational risk-taking behaviour among U.S. property liability insurers, according to researchers at Florida State University and the University of North Texas, who found that “closely held” stock companies are the least risky, followed by mutuals, mutual-owned stocks, stocks closely held by others and widely held stock companies.

Their study tests various theories of ownership and risk, asking a key question about the relationship between the two: does more separation from ownership mean more risk?

The answer varies depending on the research approach, they discovered: simply classifying companies as stocks or mutuals revealed that stock insurers are more risky than mutuals; but by sub-classifying them–widely held, closely held, etc.–the closely-held stock firms are deemed least risky, according to their study, published in a recent issue of the Risk Management and Insurance Review.

A company’s approach to risk ultimately affects price and coverage availability as well as solvency, they point out, adding that “a better understanding of this dynamic across a more complete spectrum of ownership structures is important for regulators tasked with ensuring insurer solvency.”

Risk and responsibility

After examining earlier studies that correlate risk with owner models, the researchers studied ownership information drawn from A.M. Best Insurance Reports between 1996 and 2004, examining the risks associated with different models along with firm size, distribution system, use of outside directors, reinsurance amounts and the size of the market in their region.

Using the A.M Best Capital Adequacy Ratio (BCAR) as a summary risk measure, they found that widely held stock companies had lower BCAR measures than closely held ones, suggesting that “ownership concentration in closely held companies results in less risk taking as the wealth of these individuals is less diversified than in widely-held companies.”

But after examining a broader array of ownership structures, ranging from mutual, stock, widely held stock, and stock widely held by others or management, their research revealed that “each ownership class is significantly different from all other ownership classes with regard to risk.”

More specifically, “mutual insurers are associated with lower risk than all stock ownership classes except stocks closely held by management,” they write, adding that, “interestingly, mutual-owned stock insurers are significantly different from both mutual insurers and all of the stock ownership classes.”

Among stock insurers, the level risk goes up as the gap between ownership and control increases, from stocks closely held by management to those widely held, proof that risk dwindles when “owners/managers have both their financial capital and human capital concentrated in the same firm.”

Their results aren’t just a general gauge of risk–”in an era marked by heightened concern about corporate responsibility and risk-taking incentives, these results are important to a variety of stakeholders,” they conclude.