On the Demand for Corporate Property Insurance

Abstract

Since changes in the firm-specific or unsystematic risks faced by a corporation have no effect on firm value, corporate insurance purchases might seem unwarranted. However, more than 57 percent of insurance premiums are paid by businesses. This apparent contradiction has motivated researchers to suggest factors other than simple risk reduction that create corporate incentives to purchase insurance. This article tests the practical validity of most of the analytic arguments regarding corporate demand for insurance. In general, the empirical evidence from corporate property insurance purchases is consistent with the various theoretical arguments regarding corporate demand for insurance. The results suggest insurance helps to reduce various agency costs associated with stakeholder conflicts, provides real services, and reduces taxes. Finally, the less risky nature of regulated industries compared with unregulated industries is believed to lessen the various corporate incentives to purchase property insurance.