I. EFFICIENT INSURANCE MARKETS- RISK SHARING VERSUS EFFICIENCY

Note: This paper is preliminary. Please do not quote without the authors ’ permission. 1The basic ideas were first laid out in the path breaking work of Karl Borch (1962) and were developed later in the work of John Marshall (1974), Georges Dionne and Neil Doherty (1993), and others. 2Technically, the mutual could call for new capital contributions from its members, but if this is too large, then many will simply walk away. Nor can mutuals easily secure new capital from capital markets. Stock insurers also are likely to have difficulty raising capital following a large loss shock due to informational asymmetries between insurers and the capital market regarding reserve adequacy and exposure to similar future losses (Cummins and Danzon 1997)