Liability Insurance Industry Research Articles

How's the recovery? Salvage and subrogation in the property liability insurance industry

Insurers have significant flexibility in the management of the claims process and the degree to which they prioritize the collection of salvage and subrogation. These decisions could materially impact the financial well-being of insurers as well as the prices paid by consumers. Given the potential implications that salvage and subrogation can have for insurers, consumers, and regulators, we investigate the relation between the speed at which U.S. property-liability insurers recover salvage and subrogation and insurer-specific financial and operational characteristics. The analysis is conducted for commercial and personal auto lines of business and studies both physical damage and liability coverages. The findings indicate that factors such as leverage, profitability, size, and accrual decisions are associated with the speed of recovery but that considerable differences exist across coverages.

A re‐examination of the US insurance market's capacity to pay catastrophe losses

AbstractCummins, Doherty, and Lo (2002) present a theoretical and empirical analysis of the capacity of the property liability insurance industry in the US to finance catastrophic losses. In their theoretical analysis, they show that a sufficient condition for capacity maximization is for all insurers to hold a net of reinsurance underwriting portfolio that is perfectly correlated with aggregate industry losses. Estimating capacity from insurers' financial statement data, they find that the US insurance industry could adequately fund a $100 billion event in 1997. As a matter of comparison, Hurricane Katrina in 2005 cost the insurance industry $40 to $65 billion (2005 dollars). Our main objective is to update the study of Cummins et al. (2002) with new data available up to the end of 2020. We verify how the insurance market's capacity has evolved over recent years. We show that the US insurance industry's capacity to pay catastrophe losses is higher in 2020 than it was in 1997. Insurers could pay 98% of a $200 billion loss in 2020, compared to 81% in 1997.

Perspective of Property Liability Insurance Industry and Its Determinants: An Empirical Analysis in the Post-Liberalized Era of Indian Economy

Perspective of Property Liability Insurance Industry and Its Determinants: An Empirical Analysis in the Post-Liberalized Era of Indian Economy

An analysis of post-demutualisation in the property–liability insurance industry

An analysis of post-demutualisation in the property–liability insurance industry

Does reinsurance purchasing enhance insurers’ competitiveness? Evidence from the U.S. property–liability insurance industry

This study investigates whether firms that purchase more strategic reinsurance ex ante could enhance their competitiveness in the output market ex post for the U.S. property–liability insurance industry. The empirical results show that reinsurance purchasing does not increase insurers’ competitiveness ex post, which contradicts the prediction of the strategic commitment hypothesis. A plausible explanation is that the U.S. property–liability industry tends to be a completely competitive market and not an oligopoly. In addition, reinsurance purchasing seems to be regarded as an insurer’s operational characteristic and not to be treated as a strategic demand for sending an aggressive signal on the output market to its competitors.

On the Corporate Demand for Insurance: Evidence From the Global Reinsurance Market

AbstractIn this article, we view the demand for reinsurance as a “special case” of the corporate demand for insurance. We analyze the extent to which reinsurance purchases by the global property–liability insurance industry vary across countries and assess the relative importance of country‐level factors compared with firm‐level factors. Using a data set consisting of 21,814 firm‐year observations from 33 (developed and developing) countries during the period 2000–2012, we find that after controlling for firm‐level factors, country‐level factors have economically as well as statistically significant effects on the demand for reinsurance.

The Sensitivity of Reinsurance Demand to Counterparty Risk: Evidence From the U.S. Property–Liability Insurance Industry

AbstractThis article investigates market discipline in the reinsurance market by examining the sensitivity of reinsurance demand to reinsurer counterparty risk for a sample of U.S. property–liability insurance companies. Using the financial strength rating of reinsurers as a proxy for reinsurance counterparty risk, we find evidence of market discipline that reinsurance demand is sensitive to counterparty risk. Specifically, reinsurance demand reacts negatively to reinsurer rating downgrades, with the reduction being the largest when a “weak” reinsurer gets “weaker,” followed by a reinsurer being downgraded below a benchmark rating. The sensitivity is higher for authorized reinsurance than for unauthorized reinsurance. Reinsurance demand sensitivity to counterparty risk is found to be lower for ceding insurers with higher leverage. Ceding insurers with high reinsurer sustainability are less sensitive to noncritical rating downgrades of reinsurers. Additionally, reinsurance demand is found to be less sensitive to reinsurer upgrading than to reinsurer downgrading.

Advertising Intensity in the U.S Property and Liability Insurance Industry: Market Power or Profits?

This study aims to investigate the conduct of the U.S. Property and Liability insurers on the market in relation to the structure-conduct-performance (SCP) paradigm. Advertising activities constitute the conduct of the industry and the relationship between advertising intensity and market structure is empirically tested over 14-year period. The results indicate a positive and non-significant relation between concentration and advertising and a negative and significantrelation between performance and advertising. Thus, the conduct as measured by advertising intensity does not provide an additional value to the performance of insurers in this highly competitive market. These results are consistent with all three different types of concentration measures in two different profit equations.

Forestalling capital regulation or masking financial weakness? Evidence from loss reserve management in the property–liability insurance industry

This study examines the extent to which capital thresholds induce insurers to strategically exert accounting discretion to forestall regulatory actions. Using a sample of US property–liability insurers during 1994–2009, we find that when managing their claim loss reserves, the average insurers are insensitive to the pressure of capital regulation as measured by the distance of their RBC ratio to the action threshold. Yet, when the insurers are virtually partitioned by their reserving tendency, the effect of regulatory pressure is significantly related to the downward reserve bias in the under-reserving insurer cohorts. This finding continues to hold even after we utilize the number of ratio violations in the insurance regulatory information systems to purge the financial weakness effect embedded in the distance to RBC bound ratio. Hence, our empirical evidence suggests that insurers that are about to trigger the regulatory threshold will have the incentives to understate their loss reserves to preclude the impending authorized preventive actions. Finally, our analyses also shed light on the heterogeneity of incentives to managing loss reserves among over- and under-reserving insurers.

Dependency between Risks and the Insurer’s Economic Capital: A Copula-based GARCH Model

Abstract Copulas can be a useful tool to capture heavy-tailed dependence between risks in estimating economic capital. This paper provides a procedure of combining copula with GARCH model to construct a multivariate distribution. The copula-based GARCH model using a skewed student’s t-distribution controls for the issues of skewness, heavy tails, volatility clustering and conditional dependencies contained in the financial time series data. Using the sample of U.S. property liability insurance industry, we perform Monte Carlo simulation to estimate the insurer’s economic capital measured by Value-at-Risk (VaR) and Expected Shortfall (ES). The result indicates that the choice of dependence structure and business mix between asset classes and liability lines has a significant impact on the resulting capital requirements and diversification benefits. We find the incremental diversification benefit in terms of a reduction in the total capital requirement from the joint modeling of underwriting risk and market risk compared to the modeling of market risk only.

How much catastrophe insurance fund needed in China for the ‘big one’? An estimation with comonotonicity method

Providing natural disaster risk insurance is one of the Chinese government’s concerns. Based on the necessary conditions for maximizing the capacity of property–liability insurance industry, a theoretical model of scale of catastrophe insurance fund is constructed which is correlated with the confidence level of the fund sponsor, policyholder’s surplus of industry, industry expected losses and the catastrophe losses faced by the industry. By analyzing the model, the sum of independent catastrophe insurance funds is found to require more capital than joint catastrophe insurance fund, and higher confidence level also results in higher scale of fund. Applying comonotonicity method, which is the first of its kind, we calculate the scale of catastrophe insurance funds. We also find the empirical results support the theoretical analysis.

Organizational Forms and Internal Capital Market: Evidence from the U.S. Property and Liability Insurance Industry

We examine how organizational forms affect the performance of internal capital markets (ICMs), one of important activities in the business group setting. Specifically, we study the difference in the size and efficiency of ICMs between mutual and stock firms. We measure the size of ICMs using net reinsurance ceded to affiliated companies and evaluate the efficiency of ICMs by investigating the relationship between ICM transfers and investment in lines of high and low profitability. We find that mutual firms have smaller size of ICMs. Mutual firms’ ICMs have lower ability to facilitate investment in highly profitable lines of business. The evidence indicates the heterogeneity of ICM efficiency across different forms of organization in P&L insurance industry.

AN INVESTIGATIONOF MARKET CONCENTRATIONAND FINANCIAL STABILITYIN PROPERTY–LIABILITY INSURANCE INDUSTRY

AbstractThe article investigates whether the market concentration is associated with an insurer's financial stability in the U.S. property–liability insurance industry over the period 1992–2010. We employ two‐stage least squares techniques with instrumental variables to address likely endogeneity problems. The results show that higher market concentration is associated with lower financial stability of insurance firms, consistent with the “concentration‐fragility” view. Our results indicate that firm‐specific characteristics including firm size, underwriting leverage, organizational form, product and geographical diversification, along with the exposure to natural catastrophes and macroeconomic conditions are important determinants in ensuring a safe and sound insurance system. Robustness tests using various estimation methods and alternative measures of financial stability present consistent results.

Corporate Governance and Cash Holdings: Evidence From the U.S. Property–Liability Insurance Industry

AbstractThis article examines the impact of board and finance committee characteristics on insurers' cash holdings using a sample of 1,454 U.S. stock property–liability insurer‐year observations. We focus on the roles of independent board members and independent finance committee members. Our results suggest that independent board members allow managers to hold excess cash holdings to avoid underinvestment and play a monitoring role in managers' cash spending behavior in a regulated industry. The overall findings are consistent with the independent director responsibility hypothesis, which suggests that independent directors play a monitoring role in managers' cash spending behavior and avoiding underinvestment problems.

Cyclicity in the French Property–Liability Insurance Industry: New Findings Over the Recent Period

AbstractThis article reinvestigates the presence and the causes of the underwriting cycle in the French property–liability insurance industry as displayed by the combined ratio for the 1963–2008 period. The question is still a timely issue if we refer to regulation issues and the recent proposals in the Solvency framework to take into account the fluctuations of the profitability in specifying the solvency capital requirement. In the literature, two approaches are traditionally adopted to investigate the underwriting cycle. The first one refers to an endogenous characterization of the cyclical properties from an AR(2) model. The second one claims that the cycle in the property–liability insurance has exogenous sources related to the financial markets and the general economy. In this article, we reconcile the two approaches by using a smooth transition regression model. This model shows that the AR(2) model is relevant in a first regime where the capacity constraint is binding. In contrast, the fluctuations in the combined ratio are positively influenced by the lagged stock market return in a second regime where the capacity is not constrained, as for the most recent period. Moreover, we find that the current capacity is related to the lagged inflation rate in the latter case. These results confirm the idea that the European rules regarding the solvency capital requirement for insurance companies should take into account the state of the economy and the financial markets.

Liquidity creation or de‐creation: evidence from US property and liability insurance industry

PurposeThe purpose of this study is two‐fold. The first purpose is to properly measure the level of US property and liability (P/L) insurers liquidity creation, applying the liquidity creation measure developed by Berger and Bouwman. The second purpose is to identify factors affecting P/L insurers' liquidity creation using a regression. Particularly, this paper tests two competing hypotheses regarding the relationship between the level of capital and liquidity creation.Design/methodology/approachThe paper calculates liquidity creation for the US P/L insurers. First, the paper categorizes all items in assets, liabilities and surplus into liquid, semi‐liquid, or illiquid. This process is based on the ease, cost, and time for insurers to meet their contractual obligation to obtain liquid funds or to pay off their liability. The paper also constructs the regression model to test the impact of insurers' surplus level on liquidity creation while controlling for the firm‐specific variables. The paper examines this relationship for the time period between 1998 and 2007.FindingsContrary to the study of depository institutions, the paper reports that P/L insurers are liquidity destroyers than liquidity creators. This paper also provides that liquidity destruction varies over time and differs among insurers in different size. The total amount of liquidity destruction ranges from 47 to 58 percent of insurer total asset. In addition, the results of a regression show that insurer capital is negatively related to the level of liquidity creation. This provides implications that insurers with lower level of capital face more regulatory requirements and are forced to meet liquidity demand more.Practical implicationsThe level of liquidity creation and the trend of liquidity creation of P/L insurers are of particular interest to regulators and consumers because the level of liquidity creation as shown during the financial crisis has a significant adverse impact on the financial intermediaries.Originality/valueThe paper do not aware of any study that attempts to measure liquidity creation by insurers and its relationship with both organizational and financial characteristics. The paper reports that P/L insurers are, unlike depository institutions, liquidity destroyers. Whether or not P/L insurers create/destroy liquidity is an interesting economic question to shed light on the roles of P/L insurers as a financial intermediary.

An empirical study of medical liability insurance in Nanjing

Medical liability insurance is a latecomer in China,and faced with many challenges ever since.This paper picked medical liability insurance in Nanjing as an empirical study example,as the author analyzed the insurance,underwriting and premiums of medical liability insurance,as well as the insurance programs and claim settlements from 2008 to 2012.In addition to noting problems found in medical liability insurance in Nanjing,the author proposed the roadmap for China' s medical liability insurance,with reference to experiences of overseas medical liability insurance industry. Key words: Medical liability insurance; Medical accident; Compulsory liability insurance; Empirical study

Quantile Regression Analysis of Corporate Liquidity: Evidence from the U.S. Property–Liability Insurance Industry

This study analyses the determinants of corporate liquidity for the U.S. property–liability insurance industry from 2006 to 2010. Unlike previous studies using the ordinary least squares (OLS) approach, this study applies the quantile regression (QR) method. The QR method provides further insights on how insurers’ liquidity level is determined, especially for the firms at the lower and the higher quantiles. We found that leverage and organisational structure have opposite effects on insurers’ liquidity in the lower and the higher quantile groups. The empirical results also show that most firm-specific characteristics and macroeconomic conditions influence the insurers’ liquidity, which are consistent with the findings of the OLS approach in previous studies.

The Role of RBC, Hurricane Exposure, Bond Portfolio Duration, and Macroeconomic and Industry‐wide Factors in Property–Liability Insolvency Prediction

AbstractThis research analyzes the performance of the risk‐based capital (RBC) ratio and other variables in predicting insolvencies in the property–liability insurance industry during the period 1994–2008. The results indicate that the accuracy of the RBC ratio in predicting insolvencies is inconsistent over time and that some previously tested financial ratios that are part of the FAST system do not always reliably predict insurer insolvency. In addition, the insolvency propensity is found to be significantly related to an insurer's hurricane prone area exposure, changes in interest rates, the industry‐wide combined ratio, and the industry‐wide Herfindahl index of premiums written.

An Analysis of Contingent Commission Use by Property–Liability Insurers

AbstractThe payment of contingent commissions in the property–liability insurance industry has long been commonplace, but recent events have made the practice highly controversial. Even prior to these events, wide variation existed among insurers in their use of contingent commissions. In this article, we examine the determinants of whether or not an insurer chooses to pay contingent commissions at all, as well as the determinants of the extent of their use for those insurers that pay them. We find a number of variables that have a significant relation to the use and extent of use of contingent commissions.