INTRODUCTION The recent financial condition of the insurance industry and new risk-based capital requirements have led insurers to innovative financing techniques. One method of raising capital, the use of initial public offerings (IPOs), has been used successfully by a number of insurers.(1) Prior to the 1990s, the use of IPOs by insurers was relatively uncommon. However, as capital needs increase for the industry, IPOs are likely to become a significant source of financing. A number of studies demonstrate that IPOs of common stocks are typically underpriced. A number of models have been proposed to explain this phenomenon. Welch (1992) developed a pricing model to explain this tendency. According to this model, when a homogeneous common value good (many similar items that are sold at the same price to different buyers) - such as an IPO or high-yield debt - is sold to a large number of investors sequentially and there is some noise in each investor's signal about the true value of the good, the purchase decisions of later investors depend on what earlier investors have decided. If this is the case, later investors who can observe previous demand will sometimes base the decision to purchase exclusively on earlier sales and ignore their own signals about the true value, thus leading to a cascade. As a consequence of this cascade phenomenon, the danger of starting a negative cascade, in which no one will buy regardless of the signal received, may be so high that sellers always decide to underprice so that all goods are sold. Whereas Welch applies the cascade model to pricing IPOs, this article applies the model to insurance. The assumptions of the cascade model are met in the marketing of certain insurance policies that require cooperation among a large number of insurers, or other risk bearers, in order to establish a price and other policy terms.(2) These policies, termed special risks in this article, are generally very large risks, with a maximum probable loss that significantly exceeds the capacity of an individual insurer, even with reinsurance, to bear. Thus, the insurance market provides an additional opportunity to test the cascade model. The following section provides a brief overview of the securities market and IPOs with a review of the relevant literature, including a description of the cascade model. The next section provides a classification of insurance marketing systems into competitive and cooperative, to set the stage for a test of the cascade model for insurance pricing. The subsequent section presents three pricing models: competitive pricing, cooperative pricing without cascades, and cooperative pricing with cascades. Later sections compare these models and incorporate empirical results. THE SECURITIES MARKET AND IPOs Securities markets, such as the New York Stock Exchange (an organized exchange) or the NASDAQ (an electronic network), provide a method for determining security prices. These institutions are termed secondary markets, as they allow investors to trade securities that have previously been sold by the issuing firm. On organized exchanges prices are established by an open outcry auction market. For the NASDAQ markets, investors trade at the most favorable price quoted through the network. Thus, the prices of secondary market securities tend to reflect the consensus of their fair market value. Most trades are small enough that there are many potential participants willing to accept the entire transaction. Thus, the trade usually takes place at a single price with a single entity. In contrast with the open bidding approach for secondary market securities, the primary market for a firm's initial public offering of stock involves negotiation with multiple potential buyers. Two methods of distributing IPOs exist. One is a best efforts offering, in which the underwriter tries to raise all of the desired capital at the negotiated price. If demand at this price is not sufficient, the offering fails. …