Therefore, independent agents should be used more frequently by Lloyds and closely-held stocks because the value of bonding against opportunistic behavior should be higher for these ownership structures.
In particular, the independent agency system is adopted by a higher percentage of Lloyds and closely-held stocks, followed in order by widely-held stocks, mutuals, mutual-owned stocks, reciprocals, and association-owned stocks.
The results (reported in the last three columns of Table 2) show that independent agency insurers (in terms of both mean and median) write more business than exclusive agency insurers in Lloyds, closely-held stocks, and widely-held stocks.
(For example, the fraction of direct premiums written by independent agency insurers is 82 percent for widely-held stocks, 95 percent for closely-held stocks, and 95 percent for Lloyds.) (3) We observe substantial variation in distribution system choice within groups (28 percent of the group firms are in groups that include both independent agency and exclusive agency insurers).
Conversely, Lloyds associations, closely-held stock companies, and (to a lesser extent) widely-held stock companies have a comparative advantage in writing insurance for which managerial discretion is more important.
Table 1 reports separate logistic regression results (estimated via maximum likelihood) for group and nongroup companies.(8) We omit the Lloyds dummy variable from regressions 1, 2, and 3 and both the Lloyds and closely-held stock dummy variables from regressions 4, 5, and 6 to avoid singularity in the independent variable matrices.
According to the ruling, "Potential future income is a major factor in many valuations of closely-held stocks
, and all information concerning past income which will be helpful in predicting the future should be secured ....
In the next section, we classify ownership of stock insurers and discuss the differences between widely-held stocks, closely-held stocks, stocks owned by mutual insurers, and stocks owned by associations.
Closely-held stocks. A stock company is closely held if there is a substantial merger of the manager and owner/risk-bearer functions.
Because the benefits of both closely-held stocks and Lloyd's stem from managerial discretion, we expect these structures to have a comparative advantage in writing insurance where discretion is important.
Similarly, because of the managerial control problem, Lloyd's associations and closely-held stocks should more frequently offer coverage where discretion in adjusting rates to changing risks is most important.
Lloyd's associations, closely-held stocks, and widely-held stocks are expected to offer insurance in lines requiring relatively more managerial discretion than those offered by mutuals, and, hence, they are expected to incur additional costs.