The impact of agency cost on the pricing of Praticipating policies

This paper attempts to fill a gap in the existing literature by extending the analysis in Grosen and Jorgensen (1999) about the fair pricing model of participating policies to introduce the agency cost of overinvestment and underinvestment. Differ from the original model, here the investment strategy of company is assumed inefficient. Managers’ behavior, which is projected on the investment results directly, will be affected by the bonus generated last period. We formally demonstrate how participating policies exacerbate the shareholder-manager incentive conflict. Moreover, our results support Krishnaswami and Poitter’s research which suggests that participating policies would be more likely in firms where the costs of policyholder-manager incentive conflicts dominate the costs of shareholder-policyholder incentive conflicts.