Agency Theory and Participating Policy Usage Evidence from Stock Life Insurers

Extant literature demonstrates that participating policies mitigate shareholder-policyholder incentive conflicts in stock insurance firms. However, extending the argument in Mayers and Smith (1994), the authors formally show that participating policies also exacerbate the shareholder-manager incentive conflicts in stock insurance firms. In this article, the authors test whether hypotheses derived from agency theory explain the usage of participating life insurance policies by stock insurers. The authors' results are consistent with the argument that participating policy usage is dictated by the trade-off between the mitigation of the contracting costs of risk shifting and underinvestment, and the exacerbation of the incentive conflicts between managers and shareholders.