Stock Insurers Research Articles

Is the Risk-Based Mechanism Always Better? The Risk-Shifting Behavior of Insurers Under Different Insurance Guarantee Schemes

Insurance guarantee schemes (IGSs) aim to protect policyholders from the costs of insurer insolvencies. However, IGSs can also reduce the incentives of insurers to conduct appropriate risk management. We investigate the risk-taking behavior of a stock insurer under insurance guarantee schemes with two di fferent fi nancing alternatives: a flat-rate premium assessment versus a risk-based premium assessment. Previous studies indicate that the flat-rate premium assessment can induce insurers to take more risks, a problem that can be resolved under the risk-based premium assessment. Our results show that the risk-taking incentive of the insurer can also occur under the risk-based IGS. The risk-based mechanism is only superior to the flat-rate one, if an appropriate premium loading is included. Furthermore, we identify which IGS leads to higher policyholders' welfare, measured by their expected utility. We fi nd that the risk-based IGS can be more advantageous in improving the policyholders' welfare due to the limited risk of the insurer, compared to the flat-rate IGS.

Empirical analysis of reinsurance utilisation and dependence with respect to its impact on the performance of domestic non-life stock insurance companies operating in the private sector of Pakistan

This study is based on the association that exists between profitability and reinsurance of private sector non-life stock insurers of Pakistan. Reinsurance can act as an important character in consideration of risk, risk underwriting and efficient management of claims. As insurance industry is equipped with risk coverage tools, it is time for it to provide protection from such major risks so that the potential impairment of such risks can be reduced. Insurance industry is important for the progress of a country and reinsurance is significant for the expansion of insurance industry. So, the study investigates whether the profitability is affected by reinsurance or not. The results of this study are quite in line with previous studies and signify that profitability of the firm is sensitive to change in reinsurance utilisation and has a positive relationship with it, while dependence and exposure of reinsurance do not have any impact on it.

Investment risk taking by institutional investors

According to theory, institutional investors face both risk-management and risk-shifting incentives. This article assesses the relevance of these conflicting incentives for Dutch pension funds and insurance firms over the period 1995 to 2009. Using a unique and extended data set, we observe a significant positive relationship between capital and asset risk for insurers, indicating that risk-management incentives dominate in the Dutch insurance industry. Risk-shifting incentives, however, also seem relevant, as stock insurers take more investment risk than their mutual peers. For Dutch pension funds, we conclude that overall neither risk-shifting nor risk-management incentives seem to dominate. Interestingly, we find that professional group pension funds take significantly less investment risk than other types of pension funds. This finding is in line with expectations, as in professional group pension funds potential incentive conflicts between pension fund participants and the employer are effectively internalized.

Business Cycles and Optimal Reinsurance

We investigate optimal reinsurance and asset allocation strategies for an insurer who is concerned about changes in economic conditions. Numerical examples with carefully estimated parameters show that optimal reinsurance and asset allocation strategies for an insurer could be non-myopic, meaning that they could be affected by future market conditions, and change drastically according to current economic conditions. However, an insurer with poor financial prudence might be myopic so that the optimal strategies are similar to those of the single-regime model. We also show that drastic changes of the correlation between stock prices and insurance claims, investment opportunity, and loading factors might significantly affect optimal reinsurance strategy, asset allocation strategy, or both, of insurance companies.

Stock return and market risk: A comparison between conventional insurance and takaful

The focus of this study was to examine the relationship between market risk and stock return of different markets of insurance, namely, conventional insurance and takaful. In order to estimate the market better with care, the variance of the stock return was examined as well. Earlier studies in determining the relationship between risk and return of insurer stock return employed the assumption that variance is constant over time. However, empirical evidence rejected the notion of a constant better and pointed to changing risk premium and returns variability over time. As a consequence, this study employed CAPM-GARCH (1,1) in order to estimate the market return coefficient and took the time varying volatility into consideration. Data for monthly stock return for Syarikat Takaful Malaysia as representative of the Takaful market, Hong Leong Finance Group as representative of the conventional insurance market and Kuala Lumpur Composite Index as market return were obtained from Bursa Malaysia. The time period of study was from February 1997 to February 2008. The results showed that there are clusters of volatile movements in both companies stock return with intervening periods of relative stability. This implied that GARCH is the appropriate model for insurance stock return. The results also proved that for market movements, the effect varies across these two firms. These results were expected since each company will have a different exposure towards the fluctuation of market movements. Key words: risk, return, CAPM-GARCH, conventional insurance, takaful

The Impact of the Interest Rate on Insurance/Financials Industries: The Analysis of the Stock Market's Reactions to Federal Funds Rate Changes

Taking an event-study approach, this article examines the impact of the interest rate on the insurance industry and its subindustries in contrast with other financials industries through the analysis of the stock market's reactions to federal funds rate changes. In addition to calculating the stock market's reaction on event days, this article analyzes market over- or underreaction by examining the stock market's responses on the following days. Furthermore, the stock market's reaction on days preceding event days is explored to test pre-announcement effects. This article also investigates asymmetries in responses of insurance and financials stock markets to certain characteristics of federal rate changes. This research provides important insights to investors, regulators and policymakers, and the management of insurance and financials companies in understanding the link between monetary policy and asset prices and the policy transmission mechanism particularly related to insurance and financials industries.

Insurance Stock Returns Sensitivity to Changes in the Default Spread

Default spreads between corporate bonds and government bonds proxy the systematic risk of default. Using insurance monthly stock returns covering a period from 2000 through 2009, this paper investigates empirically the relationship between insurance company stock returns and default spreads. We find evidence of stock return sensitivity to changes in the default spread. The results are consistent for property- liability and life-health insurance companies.

Competing Models of Organizational Form: Risk Management Strategies and Underwriting Profitability in the Swedish Fire Insurance Market Between 1903 and 1939

Mutual and stock insurers have coexisted and competed against each other in insurance markets for centuries. In this article, we examine the risk management strategies and underwriting profitability of the different organizational forms in Sweden's property fire insurance market between 1903 and 1939. We demonstrate that stock insurers acted as intermediaries between policyholders and reinsurers to operate effectively in the potentially high-risk segments of the fire insurance market. In contrast, nationwide mutual insurers kept larger reserves to balance fluctuations in claims experiences, while local insurance pools relied on social obligation and trust to mobilize capital after adverse fire events.

Did Federal Funds Target Rate Changes Affect the Market Value of Insurance Companies?

In this paper, we study the sensitivity of insurance companies’ stock returns with respect to expected and unexpected changes in the Federal funds target rate over the period 1988-2007. We confirm Bernanke and Kuttner (2005) that, as stocks in general, insurance stock returns are only sensitive to the unexpected changes in the Federal funds target rate, but not to the expected ones. However, market-adjusted stock returns do only show a reaction for the non-life insurers. For life insurers, there does not seem to be an industry specific effect on their market value. This can be explained by the business models life and non-life insurers adopt.

CHALLENGES ASSOCIATED AND CUSTOMER’S PERCEPTION ABOUT CHANGES IN FINANCIAL INDUSTRY, PRE AND POST IMPLEMENTATION OF E-FINANCE

This research undertakes the detailed study of the customers’ perception about E-Finance and analyzes the opinion of customers regarding advancement in financial industry post implementation of E-Finance, challenges associated with the implementation of E-Finance, and the challenges that Indian financial industry is still going through to deal electronically efficiently and effectively. The report has been designed after doing detailed secondary research so as to understand the challenges that had been there at the time of implementation of E-Finance, to what extent they have been addressed and the challenges that are still prevailing as obstacles in the successful progress of E-Finance. In order to meet other objective of study i.e. study of customer opinion regarding changes in financial industry, pre-post implementation of E-Finance, Primary Research has been undertaken. To study the same, a sample of 100 customers has been surveyed. Questionnaires have been used as instruments for the survey. The findings of the report say that Lack of Infrastructure, Security, Awareness and knowledge on part of customer as well as employees and skills were the major challenges at the time of implementation but issues like Illiterate population, infrastructure issues like power shortage, low bandwidth, and lack of security are still obstructing the growth of E-Finance. As far as customers are concerned, they are very much easy with the adoption of technology in Finance sector but there are areas in finance which have not been adopted by customers electronically as of now and are still in infant stage like Insurance and Online Stock Dealings. Customers believe that E-Finance has facilitated them and has definitely improved the financial sectors on various parameters. It is recommended that financial sector should undertake certain initiatives to educate the population which is still unaware of same since it constitutes a large part, to implement stricter security checks and stringent cyber laws and regulations so as to provide better services and improve financial sector further. This paper helps to understand the challenges associated with E-Finance and customer’s point of view regarding the services since the development of technology in the financial sector and what relevance they find of technology involvement in the financial industry that helps organizations to improve them on various parameters.

The Impact of Catastrophes on Insurer Stock Volatility

AbstractThis article investigates the impact of natural catastrophes and the 9‐11 attacks on (1) the volatility of insurance stocks and (2) the correlation of insurance stocks with the market. We find that natural catastrophes increase the volatility of insurance stocks. They also have a tendency to reduce the correlation of insurance stocks and the market. Investors can, consequently, diversify natural catastrophe risk by additionally holdings of a market portfolio. However, this does not hold for 9‐11. The events of 9‐11 led to increases in volatility and, simultaneously, to an increase in correlation. We also find evidence that 9‐11 increased the beta of insurance stocks.

Insurance Stock Returns and Economic Growth

In this paper, we propose to use insurance stock returns as an indicator of insurance activities, and apply a dynamic panel technique to examine the link between the role of insurance and economic growth. Our empirical results show that after we control for the variations of market index returns, there is a significantly positive relationship between insurance stock returns and future economic growth. Furthermore, we also investigate how law environment and governance quality affect the link between the role of insurance and economic growth. The empirical results are consistent with our expectation that a well-defined law environment and governance quality facilitate the functioning of insurance companies, and strengthen the role of insurance in economic growth. We find generally that the effect of law and governance on the link between the role of insurance and economic growth is more significant in developed markets than in emerging markets.

Organizational Structure, Board Composition, and Risk Taking in the U.S. Property Casualty Insurance Industry

AbstractThis study examines the impact of organizational structure and board composition on risk taking in the U.S. property casualty insurance industry, addressing different risk‐taking behaviors from different perspectives. The risk‐taking measures include total risk, underwriting risk, investment risk, and leverage risk. The evidence shows that mutual insurers have lower total risk, underwriting risk, and investment risk than stock insurers. In terms of board composition variables, we find that some board composition variables not only have impact on risk‐taking behaviors but also affect different risk measures differently. Thus, using different risk measures is better than using one risk measure to assess risk‐taking behavior. Finally, we conclude that an insurer can control its total risk through management of underwriting, investment, and leverage risks that determine an insurer's risk profile.

Internal and external drivers for risk taking in UK and German insurance markets

The aim of this paper is to analyse the impact of both firm-specific and external factors on the risk taking of European insurance companies. The extent of risk taking is quantified through variations in stock prices and these are explained by firm-specific and external factors that proxy the environment in which the insurers are active. Using a two-way panel regression analysis with fixed and random effects, our empirical study covers hand-collected data on 35 German and UK insurance companies for the period 1997 to 2010. We find that differences in company size, capital structure, liquidity, and economic development affect variations in stock prices. The analysis also highlights differences between the market-based UK corporate governance system and the control-based regime implemented in Germany, with the UK exhibiting a higher level of risk, compensation, and board independence. We also document increases in the volatility of insurance stock returns during the financial crisis.

Catastrophes and Insurance Stocks – A Benchmarking Approach for Measuring Efficiency

AbstractThis study uses the numeraire portfolio to benchmark insurance stock returns as a natural measure for detecting abnormal insurance stock returns from catastrophic events. The assumptions underlying the efficient markets hypothesis using a numeraire denominated returns approach hold for catastrophic insurance events whereas other more traditional methods such as the market model and Fama-French three factor model often fail, typically due to the accumulation of estimation errors. We construct a portfolio of Australian insurance firms and observe the market reaction to major insured catastrophic events. Using the numeraire denominated returns approach we observe no particular trend in the cumulative abnormal returns of insurance securities following a catastrophic event. Using both the traditional market model and the Fama-French three factor model however, we observe significantly positive cumulative abnormal returns following an insured catastrophic event. The errors inherent in the market model and three factor model for event studies are shown to be eliminated using the numeraire denominated returns approach.

Mutuality as a control for information asymmetry: A historical analysis of the claims experience of mutual and stock fire insurance companies in Sweden, 1889 to 1939

We test two competing arguments regarding the influence of organisational form on underwriting performance using data from the Swedish fire insurance industry for the years 1889 to 1939 – a period of both economic growth and stagnation. Since mutuality is a response to information asymmetry problems, mutual insurers are expected to report lower annual claims relative to premiums than stock insurance companies. However, an alternative view is that stock insurers seek to reduce information asymmetry problems by issuing non-participatory rights insurance contracts with high deductibles that induce risk-sharing between the insurer's shareholders and policyholders. This implies that stock insurers are likely to report lower annual claims than mutual insurers. Our results show that organisational form is an important determinant of the claims experience of Swedish fire insurers, suggesting that mutuality acts as an effective control for information asymmetries in the market.

Effects of Risk Management on Cost Efficiency and Cost Function of the U.S. Property and Liability Insurers

This paper adopts the one-step stochastic frontier approach to investigate the impact of risk management tools of derivatives and reinsurance on cost efficiency of U.S. property-liability insurance companies. The stochastic frontier approach considers both the mean and variance of cost efficiency. The sample includes both stock and mutual insurers. Among the findings, the cost function of the entire sample carries the concavity feature, and insurers tend to use financial derivatives for firm value creation. The results also show that for the entire sample the use of derivatives enhances the mean of cost efficiency but accompanied with larger efficiency volatility. Nevertheless, the utilization of financial derivatives mitigates efficiency volatility for mutual insurers. This research provides important insights for the practice of risk management in the property-liability insurance industry.

Investment Risk Taking by Institutional Investors

According to theory, institutional investors face both risk management and risk shifting incentives. This paper assesses the relevance of these conflicting incentives for Dutch pension funds and insurance firms over the period 1995-2009. Using a unique and extended dataset, we observe a significant positive relationship between capital and asset risk for insurers, indicating that risk management incentives dominate in the Dutch insurance industry. Risk shifting incentives, however, also seem relevant, as stock insurers take more investment risk than their mutual peers. For Dutch pension funds we conclude that, on average, neither risk shifting nor risk management incentives are dominant. Interestingly, we find that professional group pension funds take significantly less investment risk than other types of pension funds. This finding is in line with expectations, as in professional group pension funds potential incentive conflicts between pension fund participants and the employer are effectively internalized.

Determinants of Corporate Diversification: Evidence From the Property–Liability Insurance Industry

AbstractThis article analyzes variations in line‐of‐business diversification status and extent among property–liability insurers. Our results show that the extent of diversification is not driven by risk pooling considerations; insurers operating in more volatile business lines do not diversify more. Diversification can rather be explained by the benefits of internal capital markets and barriers to business growth like market size and concentration. In our analysis, we distinguish between related and unrelated diversification. Using a measure of unrelated line‐of‐business diversification we find the first support for the diversification prediction of the managerial discretion hypothesis that mutual insurers should be less diversified than stock insurers. While mutual insurers tend to exhibit higher levels of total diversification, they engage in significantly less unrelated diversification than do stock insurers.

CEO Turnover and Ownership Structure: Evidence From the U.S. Property–Liability Insurance Industry

AbstractThis article examines the impact of ownership structure on the relation between firm performance and chief executive officer (CEO) turnover in the U.S. property–liability insurance industry. Theoretical implications of stock versus mutual ownership structures on the performance–turnover relation are ambiguous. Our empirical results indicate that CEO turnover is less responsive to firm underwriting performance in mutual insurers compared to stock insurers. In fact, we find that while CEO turnover for stock firms is negatively related to prior performance, no such relationship is found for mutual insurers. These results hold while controlling for board structure and other relevant factors.