The Ownership Complaint Gap: Mutual versus Stock Intermediaries

Abstract

<jats:p>We document a substantial customer complaint gap between stock and mutual financial firms. To assess whether this 21% per year complaint gap stems from complaint-prone customers in stock insurers, we examine state-adjudicated complaint success. To further delineate between customer selection or treatment explanations, we exploit within insurer complaints around random claims (natural disasters) and attention shocks (media scrutiny). Further tests reveal the complaint gap widens with greater competition, near insolvency thresholds, and with more price regulation. Overall, the results are inconsistent with the hypothesis that mutual financial firms exhibit low customer satisfaction, suggesting customers find this a beneficial organizational structure.</jats:p>

The effect of accounting for income tax uncertainty on tax‐deductible loss accruals for private insurers

“…25 In terms of economic significance, the coefficient estimate in Column 4 (-0.0110, t = 2.44) indicates that relative to public insurers, private insurers on average reduce reserve errors by an economically significant amount, approximately 1.1% of their total admitted assets, resulting in approximately $4.44 million less in annual tax savings at a statutory tax rate of 35% for the average firm. 26 Our results show that many of the control variables are significantly related to loss reserve errors in a way that is consistent with prior studies (e.g., Cheng, Qian, et al, 2020;Grace & Leverty, 2010, 2012Harrington, 2002;Nelson, 2000). For example, the coefficients on the predicted probability of failure (PrFail) are negative and significant in Columns (1) and (3), indicating that the incentive to underestimate reserves is an increasing function of the insurer's financial weakness (Petroni, 1992).…”

“…We control for insurers' lines of business as well as their product line and geographic diversification because the nature and complexity of the insurer's business structure might affect its loss provisions. We classify all lines of business into personal lines ( NetPremium Personal ), commercial long‐tail business lines ( NetPremium Commercial ), or commercial short‐tail business lines (Cheng, Qian, et al, 2020). Commercial long‐tail business lines are the most complex type of insurance, and personal lines the least (Regan, 1997).…”

“…We use Herfindahl indices to measure the diversification of insurers' product lines and geographical coverage ( Herfindahl Line and Herfindahl State , respectively). Herfindahl Line is the sum of the squared percentage of premiums earned in each of the lines written by the insurer, and Herfindahl State is the sum of the squared percentage of business the insurer writes in each of the 50 states and the District of Columbia (Cheng, Qian, et al, 2020).…”

“…12 State insurance regulators are responsible for overseeing the solvency of US insurance companies to ensure a sound and stable market and thus the health of the industry. In addition, state regulators play a crucial role in the state economy and employment (Cheng, Qian, et al, 2020). According to the US Department of Labor, the insurance industry provides substantial employment-2.5 million jobs in 2014, or about 2.1% of US employment.…”

“…Following prior research (e.g., Beaver et al, 2003;Cheng, Qian, et al, 2020;Grace & Leverty, 2010, 2012, we include a number of control variables related to the determinants of loss reserve errors, including insurers' size (Size), lines of business (NetPremium Personal and NetPremium Commercial), the diversification of business along the dimensions of product lines and geographic coverage (Herfindahl Line and Herfindahl State), reinsurance usage (Reinsurance), net premium written growth (Growth), income smoothing (Small Profit, Small Loss, Profit, and Loss), financial weakness (PrFail), group ownership (Group Affiliation), and rate regulation (Rate Regulation).…”