Property-liability Insurance Industry Research Articles

Capital-based regulation, portfolio risk and capital determination: Empirical evidence from the US property–liability insurers

This paper examines the impact of capital-based regulation on the insurer’s risk and capital adjustments in the US property–liability insurance industry. We conduct the three-stage least squares (3SLS) procedure to estimate a simultaneous equations model. The key finding is that undercapitalized insurers increase capital to avoid regulatory costs and take more risks to generate higher returns. We also investigate firm characteristics that determine the insurer’s capital structure. The results indicate that insurers appear to rely heavily on retained earnings to make up their capital shortage and insurers with greater growth opportunity may hold high levels of capital to control for agency problems. Robustness tests with an alternative risk measure and subsamples present consistent results.

Separation of Ownership and Control: Implications for Board Composition

This article investigates the implications of separation of ownership and control for board composition over a spectrum of ownership structures present in the U.S. property–liability insurance industry. We hypothesize that agency costs associated with manager–owner conflicts increase with the degree of separation of ownership and control. Greater agency costs imply a greater need for monitoring by outside directors on the board. Therefore, use of outside directors is expected to increase as the separation of ownership and control gets larger. Employing a sample of property–liability insurers exhibiting different degrees of separation of ownership and control, we find support for our hypothesis.

Are publicly held firms less efficient? Evidence from the US property-liability insurance industry

This paper studies the performance of publicly held firms in the US property-liability insurance industry by analyzing companies that issued initial public offerings (IPOs) from 1994 to 2005, using private firms as the benchmark. I investigate ex ante determinants and ex post effects of IPOs on firm efficiency, operating performance, and other financials. I also analyze stock returns and follow-on SEO and acquisition activities to provide further information on IPO motivation. The paper finds that the likelihood of an IPO significantly increases with firm size and premium growth. IPO firms experience no post-issue underperformance in efficiency, operations, or stock returns; register improvement in allocative and cost efficiency; and reduce financial leverage and reinsurance usage. Moreover, IPO firms are active in follow-on SEO issues and acquisition activities. The findings are mostly consistent with the theory that firms go public for easier access to capital and to ease capital constraints.

A Reexamination of the Relationship between Organizational Forms and Distribution Channels in the U.S. Property Liability Insurance Industry

How do property liability insurance companies choose their organizational forms and distribution channels? Prior studies have not yet provided a consistent conclusion. In this paper, we propose a reduced form approach to reexamine the relationship between organizational forms and distribution channels in the insurance industry, using cross-sectional data pertaining to U.S. property liability insurance companies in 2004. We adopt a conditional dependence test, which can overcome the sensitivity problem of the structural form setting. The results show that after we control for all explanatory variables, the relationship between organizational forms and distribution channels is conditionally uncorrelated. The result is consistent with Regan and Tzeng (1999), but contradicts the findings of Baranoff and Sager (2003) and Kim et al. (1996).

Determinants of Efficiency and Productivity in German Property-Liability Insurance: Evidence for 1995–2006

This paper provides a comprehensive analysis of efficiency and productivity in the German property-liability insurance industry, a market that has experienced significant change in recent years. Using data envelopment analysis (DEA) and covering the period 1995–2006, we find that there is potential for the market to improve by about 20 percentage points in terms of technical efficiency and about 50 percentage points in terms of cost efficiency. Furthermore, the analysis shows moderate total factor productivity growth and low efficiency growth during the sample period. A major contribution of the paper is its analysis of six efficiency determinants – firm size, distribution channels, ownership forms, product specialisation, financial leverage and premium growth – using a truncated regression and bootstrapping approach to avoid invalid inference.

Efficiency of Insurance Firms With Endogenous Risk Management and Financial Intermediation Activities

Risk management is now present in many economic sectors. This paper investigates the role of risk management in creating value for financial institutions by analyzing U.S. property-liability insurers. Property-liability insurers are financial intermediaries whose primary role in the economy is risk pooling and risk bearing. The risk pooling and risk bearing functions performed by insurers are the primary determinants of the need for risk management. The main goal of this paper is to test how risk management and financial intermediation activities create value for insurers by enhancing economic efficiency. Insurer cost efficiency is measured relative to an econometric cost frontier. Since the prices of risk management and financial intermediation services are not observable, we consider these two activities as intermediate outputs and estimate their shadow prices. The shadow prices isolate the contributions of risk management and financial intermediation to insurer cost efficiency. The econometric results show that both activities significantly increase the efficiency of the property-liability insurance industry.

Efficiency of insurance firms with endogenous risk management and financial intermediation activities

Risk management is now present in many economic sectors. However, none of existing studies consider risk management as a potential determinant of firm performance. In this paper, we investigate the role of risk management and financial intermediation in creating value for financial institutions by analyzing U.S. property-liability insurers. Our main goal is to test how risk management and financial intermediation activities create value for insurers by enhancing economic efficiency through cost reductions. We consider these two activities as intermediate outputs and estimate their shadow prices. Insurer cost efficiency is measured using an econometric cost function. The econometric results show that both activities significantly increase the efficiency of the property-liability insurance industry.

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

AbstractUsing a sample of property–liability insurers over the period 1995–2004, we develop and test a model that explains performance as a function of line‐of‐business diversification and other correlates. Our results indicate that undiversified insurers consistently outperform diversified insurers. In terms of accounting performance, we find a diversification penalty of at least 1 percent of return on assets or 2 percent of return on equity. These findings are robust to corrections for potential endogeneity bias, alternative risk measures, alternative diversification measures, and an alternative estimation technique. Using a market‐based performance measure (Tobin's Q) we find that the market applies a significant discount to diversified insurers. The existence of a diversification penalty (and diversification discount) provides strong support for the strategic focus hypothesis. We also find that insurance groups underperform unaffiliated insurers and that stock insurers outperform mutuals.

Performance evaluation model of property-liability insurance companies in Taiwan – application of analysis network process

The study establishes a performance evaluation model of Property-Liability Insurance Companies. First, we use the Modified Delphi Method to sift out influence Property-Liability Insurance effects out norms. Moreover, Analytic Network Process (ANP) is used to construct a performance evaluation model for property-liability insurance companies. The analytic network process-based decision-making method evaluation method can help decision makers evaluate the performance of property-liability insurance companies by estimating the relative weightings of the elements of each level to derive the management weight of the main-criteria in order for Business Index matrix (0.435), Profit Ability Index (0.336), Whole company Operating Index (0.229). Through empirical study uses financial statements from the property-liability insurance industry to calculate performance evaluation ranking. The study findings can provide the government with a useful reference in developing insurance policy

An Investigation Into the Diversification–Performance Relationship in the U.S. Property–Liability Insurance Industry

AbstractThis article investigates the relationship between product diversification and firm performance in the U.S. property–liability insurance industry using data over the 1994 through 2002 time period. Using various measures of product diversification and firm performance, we find that the extent of product diversification shares a complex and nonlinear relationship with firm performance. Our findings suggest that performance benefits associated with product diversification are contingent upon an insurer's degree of geographic diversification. Robustness tests using subsamples and market returns for public firms show consistent results.

Efficiency, Productivity, and Scale Economies in the U.S. Property-Liability Insurance Industry

The paper examines efficiency, productivity and scale economies in the U.S. property-liability insurance industry. Productivity change is analyzed using Malmquist indices, and efficiency is estimated using data envelopment analysis (DEA). The results indicate that the majority of firms below median size in the industry are operating with increasing returns to scale, and the majority of firms above median size are operating with decreasing returns to scale. However, a significant number of firms in each size decile have achieved constant returns to scale. Over the sample period, the industry experienced significant gains in total factor productivity, and there is an upward trend in scale and allocative efficiency. More diversified firms, stock insurers, and insurance groups were more likely to achieve efficiency and productivity gains. Higher technology investment is positively related to efficiency and productivity improvements.

Market Value Relevance of Frontier Efficiency: Evidence from U.S. Property-Liability Insurance Acquisitions and Divestitures

This paper examines the relationship between firm efficiency and stock market reaction to acquisitions and divestitures in the US property-liability insurance industry during the period 1997-2003. We use data envelopment analysis (DEA) to estimate firm cost and revenue efficiency. Abnormal returns are measured using the standard market model event study methodology. We then conduct multiple regression analysis with cumulative abnormal returns as dependent variables and efficiency and control variables as regressors. The results show that efficient acquirers and targets have higher cumulative abnormal returns but inefficient divesting firms have higher cumulative abnormal returns. The findings are consistent with insurance acquisitions and divestitures being driven primarily by value-maximizing motivations and also show that frontier efficiency provides relevant information for value-maximizing managers.

Combining ANP and TOPSIS Concepts for Evaluation the Performance of Property-Liability Insurance Companies

This is a significant problem for the property-liability insurance industry. The study first uses Modified Delphi Method to sift influence property-liability insurance effects out norms. Moreover, the evaluation weights are determined using Analytic Network Process (ANP). Finally, the technique for ordering preference by similarity to the ideal solution (TOPSIS) constructs performance evaluation model of property-liability insurance companies in Taiwan. This research use financial statements of property-liability insurance industry calculated efficiency placing and through the positive research. Findings may do for the government the important reference of the insure policy.

Mergers and acquisitions in the US property-liability insurance industry: Productivity and efficiency effects

This paper analyzes the productivity and efficiency effects of mergers and acquisitions (M&As) in the US property-liability insurance industry during the period 1994–2003 using data envelopment analysis (DEA) and Malmquist productivity indices. We seek to determine whether M&As are value-enhancing, value-neutral, or value-reducing. The analysis examines efficiency and productivity change for acquirers, acquisition targets, and non-M&A firms. We also examine the firm characteristics associated with becoming an acquirer or target through probit analysis. The results provide evidence that M&As in property-liability insurance were value-enhancing. Acquiring firms achieved more revenue efficiency gains than non-acquiring firms, and target firms experienced greater cost and allocative efficiency growth than non-targets. Factors other than efficiency enhancement are important factors in property-liability insurer M&As. Financially vulnerable insurers are significantly more likely to become acquisition targets, consistent with corporate control theory, and we also find evidence that M&As are motivated to achieve diversification. However, there is no evidence that scale economies played an important role in the insurance M&A wave.

Consolidation and value creation in the insurance industry: The role of governance

We examine the long run performance of M&A transactions in the property–liability insurance industry. We specifically investigate whether such transactions create value for the bidders’ shareholders, and assess how corporate governance mechanisms, internal and external, affect such performance. Our results show that M&A create value in the long run as buy and hold abnormal returns are positive and significant after 3 years. While tender offers appear to be more profitable than mergers, our multivariate evidence does not support the conjecture that domestic transactions create more value than cross-border transactions. Furthermore, positive returns are significantly higher for frequent acquirers and in countries where investor protection is weaker. Internal corporate governance mechanisms, such as board independence, and CEO share ownership, are also significant determinants of the long run positive performance of bidders.

Consolidation and Value Creation in the Insurance Industry: The Role of Governance

We examine the long run performance of M&A transactions in the property-liability insurance industry. We specifically investigate whether such transactions create value for the bidders' shareholders and assess how corporate governance mechanisms affect such performance. Our results show that M&A create value in the long run as buy and hold abnormal returns are positive and significant after three years. While tender offers appear to be more profitable than mergers, our evidence does not support the conjecture that domestic transactions create more value than cross border transactions. Furthermore, positive returns are significantly higher for frequent acquirers and in countries where investor protection is better. Internal corporate governance mechanisms are also significant determinants of the performance of bidders.

Mergers & Acquisitions in the U.S. Property-Liability Insurance Industry: Productivity and Efficiency Effects

This paper analyzes the productivity and efficiency effects of mergers and acquisitions (M&As) in the U.S. property-liability insurance industry during the period 1994-2003 using data envelopment analysis (DEA) and Malmquist productivity indices. We seek to determine whether M&As are value-enhancing, value-neutral, or value-reducing. The analysis examines efficiency and productivity change for acquirers, acquisition targets, and non-M&A firms. We also examine the firm characteristics associated with becoming an acquirer or target through probit analysis. The results provide evidence that M&As in property-liability insurance were value-enhancing. Acquiring firms achieved more revenue efficiency gains than non-acquiring firms, and target firms experienced greater cost and allocative efficiency growth than non-targets. Factors other than efficiency enhancement are important factors in property-liability insurer M&As. Financially vulnerable insurers are significantly more likely to become acquisition targets, consistent with corporate control theory, and we also find evidence that M&As are motivated to achieve diversification. However, there is no evidence that scale economies played an important role in the insurance M&A wave.

A micro-econometric model of the UK property-liability insurance industry

The aim of this study is to assess the effect of claims and expenses on premiums for the UK property-liability insurance industry. A cointegration approach of a multivariate system of equations is applied to disentangle the causal relationships between premiums, claims and expenses. The findings reveal that, in the long run, claims and expenses cause premiums, supporting the ‘rational expectations’ and the ‘institutional rigidities’ hypotheses. A dynamic analysis, using the impulse response functions, confirm the positive impact of claims on premiums, whilst premiums also positively affect claims, underlying that the former are price sensitive.

Solvency regulation in the property-liability insurance industry

This paper evaluates guaranty funds and solvency regulations. One main question addressed is how solvency regulations will benefit consumers. Many previous studies have found that most forms of solvency regulations do not have significant deterrent effects on insolvency. Even when solvency regulations are effective, they might still adversely affect consumers. This could happen because increasing the probability of solvency usually requires raising premiums. Therefore, it is interesting to see how regulators should design insurance regulations that benefit consumers. Insolvency of insurance firms provides a unique environment under which one is able to analyze the effects of solvency regulations and guaranty funds on the quality of insurance products and on consumers. This paper shows that guaranty funds are always desirable, but solvency regulations are of certain value only when they have the effect of protecting guaranty funds and alleviating the disincentives which they create.

Improving Risk Allocation Through Indexed Cat Bonds

Damages inflicted by natural catastrophes in recent years have accounted for economic losses of a size hitherto unknown. The estimated loss potential of some catastrophe scenarios seemingly shows the capacity limits of traditional insurance markets. For instance, estimations of insured losses after a major earthquake in the San Francisco area amount to approximately U.S.$ 100 billion; on the other hand, balance sheets of the U.S. property liability insurance industry show a cumulative surplus of about U.S.$ 300 billion, which, of course, is available not only for catastrophic risks. These ‘‘capacity gaps’’ in the industry have been at the heart of many discussions among insurance economists and practitioners in the recent past, largely aimed at the development of possible solution strategies involving the financial markets. Contributions can be expected, if, for example, the issuance of marketable insurance-linked securities was able to attract additional capacity from investors who are not otherwise related to the insurance industry. In practice, rudiments of this kind have been observed in various forms since 1992, even though they have yet to reach a significant market share. To summarize these arguments, the existence of insurance-linked securitization is often explained by its ability to (partly) close the capacity gap of the insurance supply, especially in terms of reinsurance. This line of reasoning is, however, not entirely convincing. Additional risk financing capacity could also be generated through extending capital funds held by the insurance industry or through market entries in the insurance markets. The latter, in fact, could be observed during the 1990s following hurricane Andrew. Immediately after this event reinsurers were very reluctant to cover catastrophe risk and in particular the Lloyd’s reinsurance market went through a major crisis, leading to a decline in