Capital and the Performance of Insurance Companies

Abstract

We empirically examine the effect of capital on the performance of insurance companies and how this effect varies across smaller and larger insurers. We find that capital enhances the performance of life and non-live insurers decisively. This effect is particularly high for smaller and larger life insurers, and present for non-life insurers regardless of their size. A major difference between life and non-life insurers is that market participants seem to view capital positively in their decision to invest in life insurers, but do not consider it in their decision to invest in non-life insurers. Furthermore, we find that capital does not influence insurer performance differently in times of crisis. We conclude that higher capital requirements for insurance companies are less important than for banks, but can still have a positive effect on an insurer's performance.