Internal Capital Markets and Organizational Forms

We study how the return of internal capital markets (ICMs) and the risk of ICMs differ across three alternative organizational forms: publicly-held stock insurers, privately-held stock insurers and mutual insurers. Because of the different combination of owner, manager and customer functions, these three organizational forms are subjected to different aspects and extents of agency problems, which leads to a variation in the performance of ICMs. In terms of return, we find that the sensitivity of investment increase in highly profitable business lines to ICM subsidy is significantly positive for private insurers, but is insignificant for mutual and public insurers. In terms of risk, we find that the sensitivity of investment increase in highly profitable and highly risky business lines to ICM subsidy is significantly positive for public insurers. Finally, we find that the underwriting ROA volatility is more sensitive to shadow ICM subsidy than to regular ICM subsidy for public insurers.