Property-liability Insurance Research Articles

Interest Rate Sensitivity of Financial Institutions by Liquidity Risk: Evidence from U.S. Property/Liability Insurers

Attempts to understand the impact of interest rate changes on common stock returns have resulted in numerous studies in finance literature, and significant interest rate sensitivity by stocks of financial institutions has been reported. This paper extends the extant literature by investigating US property-liability (P/L) insurer's stock returns with respect to changes in different termed interest rates and to liquidity risk of the stocks. First, returns on property/liability insurers stocks are influenced by changes in interest rates, but the direction shifts as the insurance market condition changes. This is true for every portfolio we studied, albeit at different magnitudes. Second, trading volume also plays a role in stock returns to interest rate changes.

Internal Versus External Capital Markets in the Insurance Industry: The Role of Reinsurance

This study compares internal and external sources of capital in the insurance industry by analyzing reinsurance activity between affiliated and unaffiliated insurers. Tests are performed using data from a large sample of property-liability insurers that are affiliated with at least one other property-liability insurer. Results indicate that while demands for internal and external reinsurance have some factors in common, there are cost-based differences in internal and external capital, as well as structural differences in the use of internal and external reinsurance. Results are consistent with previous theories related to internal versus external capital markets.

Deregulating Property—Liability Insurance, edited by J. David Cummins

Journal of Risk and InsuranceVolume 74, Issue 1 p. 269-272 Deregulating Property—Liability Insurance, edited by J. David Cummins First published: 08 March 2007 https://doi.org/10.1111/j.1539-6975.2007.00210.xCitations: 8Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume74, Issue1March 2007Pages 269-272 RelatedInformation

Intangible Assets and Firm Asset Risk Taking: An Analysis of Property and Liability Insurance Firms

Intangible assets facilitate insurers' capacity to retain existing business and attract new clients. In this study we analyze how the incentives to protect intangible assets affect asset risk taking behavior of property liability insurers. Our evidence supports the view that insurers' incentives to protect their intangible assets lead to an inverse relation between intangible assets and asset risk. Consistent with the view that highly levered firm may go for broke, asset risk of highly levered insurers is less elastic to intangible assets than that of lowly levered insurers. Another interesting finding is that tangible factors such as firm size and capitalization increase insurers' appetite for asset risk taking.

The influence of corporate taxes on pricing and capital structure in property–liability insurance

A change in the corporate tax level can have a significant impact on rate making and capital structure for insurance companies. The purpose of this paper is to study this effect on competitive equity–premium combinations for different asset and liability models while retaining a fixed safety level. This is a crucial consideration as a change in the tax rate leads, in general, to a different risk of insolvency. Hence, fixing the safety level serves to isolate the effect of taxes without shifting the insurer’s risk situation whenever taxes are varied. The model framework includes stochastic assets as well as stochastic claims costs. We further compare the results for liability models with and without a jump component. Insurance rate making is conducted using option pricing theory.

Cherry Picking, Disclosure Quality, and Comprehensive Income Reporting Choices: The Case of Property‐Liability Insurers*

AbstractStatement of Financial Accounting Standards No. 130: Reporting Comprehensive Income encourages enterprises to report comprehensive income on a performance statement rather than on a statement of equity. We investigate the reporting decisions of 82 publicly traded property‐liability insurers that are fairly evenly split in their choice. Our results demonstrate that insurers with a tendency to manage earnings through realized securities' gains and losses (that is, cherry pickers), as well as insurers with a reputation for poor disclosure quality, are more likely to report comprehensive income in a statement of equity. Apparently, these insurers face the highest cost of transparency. We do not find a relation between the reporting decision and the volatility of comprehensive income relative to the volatility of net income. Our findings that insurers' comprehensive income reporting choices are a reflection of their proclivity toward cherry picking as well as their level of disclosure quality should be of interest to standard‐setters because of the controversy over standard‐setters' preference for mandating all firms to report comprehensive income in a performance statement.

Discussion of “Cherry Picking, Disclosure Quality, and Comprehensive Income Reporting Choices: The Case of Property‐Liability Insurers”*

Discussion of “Cherry Picking, Disclosure Quality, and Comprehensive Income Reporting Choices: The Case of Property‐Liability Insurers”*

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.

Capital Allocation and the Pricing of Financially Intermediated Risks: An Empirical Investigation

Under perfect market conditions, standard capital budgeting theory predicts that the discount rates on projects should reflect only non-diversifiable risk and be constant across firms. However, theoretical research by Froot and Stein (1998), among others, suggests that when firms invest in non-hedgeable assets under conditions where capital is costly, project pricing should reflect the covariability of the project with the firm's existing portfolio, even if this covariability represents non-systematic risk. They argue that their theory is especially applicable to financial institutions pricing intermediated risks. Theoretical research also suggests that the prices of intermediated risks will reflect the capital strain that such risks place on the intermediary and hence reflect implicit allocations of capital to the intermediary's business lines (Myers and Read 2001, Zanjani 2002). We test these theoretical predictions by analyzing the prices of insurance risks for U.S. property-liability insurers over the period 1997-2004. Specifically, we regress insurance price variables on capital allocations by line, measures of insurer insolvency risk, and other risk and control variables. The results provide strong support for theoretical predictions that prices of intermediated risks vary across firms to reflect insolvency risk, marginal capital allocations, and non-systematic covariability.

A Nonlinear Goal Programming Model for Efficient Asset-Liability Management of Property-Liability Insurers

Optimization of the firm-level asset-liability model (ALM) is an important part of enterprise risk management. In the context of the property-liability insurer we increase thecredibility of the ALM by explicitly unifying the efficient management of financial risk factors across both sides of the economic balance sheet. The ALM presented in this research produces a simultaneous solution to the Markowitz mean-variance (MV) allocation of asset- and liability-side resources within a complex hierarchical goal environment. The nonlinear optimization method applied to the dual MV problem that is defined within the overall ALM is a separable program that encapsulates a vector optimized goal-program (NLGP). In addition to the identification of efficient combinations of traded assets and not-traded liabilities within a complex goal environment, the NLGP ALM also proves suitable for the extant characterization of credit, liquidity, and profit margin objectives.

Internal versus External Capital Markets in the Insurance Industry: The Role of Reinsurance

This study compares internal and external sources of capital in the insurance industry by analyzing reinsurance activity between affiliated and unaffiliated insurers. Tests are performed using data from a large sample of property-liability insurers that are affiliated with at least one other property-liability insurer. Results indicate that while demands for internal and external reinsurance have some factors in common, there are cost-based differences in internal and external capital, as well as structural differences in the use of internal and external reinsurance. Results are consistent with previous theories related to internal versus external capital markets.

The St Paul Travelers Companies Inc

Mergent's Dividend AchieversVolume 2, Issue 2 p. 278-278 U.S. Company Report The St Paul Travelers Companies Inc† First published: 22 April 2005 https://doi.org/10.1002/div.2449 † Contact: : Jay S. Fishman — Chmn., Pres., C.E.O. Address: : 385 Washington Street, Saint Paul, MN 55102 Web Site: : www.stpaul.com AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Abstract Insurance (MIC: 8.2 SIC: 331 NAIC: 24130) The St. Paul Travelers Companies is engaged, through its subsidiaries, in providing commercial property-liability insurance products and services. Under the Travelers brand, Co. is also a major underwriter of homeowners, auto and other insurance products for individuals and families through independent agents. Co. also has a presence in the asset management industry through its 79.0% majority ownership of Nuveen Investments, Inc. As of Apr 1 2004, Co. had total assets of $107.00 billion and a market capitalization of approximately $27.00 billion. Volume2, Issue2Spring 2005Pages 278-278 RelatedInformation

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.

The Effective Duration and Convexity of Liabilities for Property-Liability Insurers Under Stochastic Interest Rates

Managing interest rate risk for property-liability insurers requires appropriate measurement of the sensitivity of liabilities to movements in interest rates. Most prior studies have assumed that interest rates shift in a parallel fashion and that the cash flows from liabilities are unaffected by interest rate changes. This article recognizes that unpaid property-liability (P-L) insurance losses are inflation-sensitive, that movements in interest rates will affect future claim payouts due to the correlation between interest rates and inflation and that interest rates are stochastic. The effective duration and convexity of P-L insurance liabilities calculated based on this approach are substantially lower than those measured using traditional approaches, which has important implications for asset-liability management by P-L insurers.

The St Paul Travelers Companies Inc

AbstractInsurance (MIC: 8.2 SIC: 6331 NAIC:524130)St. Paul Companies is a management company principally engaged in two industry segments: commercial property‐liability insurance and nonlife reinsurance products and services. Co. also has a presence in the asset management industry through its 77.0% majority ownership of Nuveen Investments, Inc. As a management company, Co. oversees the operations of its subsidiaries and provides those subsidiaries with capital, management and administrative services. The primary business of Co. is underwriting, which produced 95.4% of consolidated revenues in 2002.

Evaluating solvency versus efficiency performance and different forms of organization and marketing in US property––liability insurance companies

Solvency is a primary concern for regulators of insurance companies, claims paying ability is a primary concern for policyholders, and return on investment is a primary concern for investors. These interests potentially conflict, and the decision-makers for the firm must trade off one concern versus another. Here we examine the efficiency of insurance companies via data envelopment analysis using solvency, claims paying ability, and return on investment as outputs and using a financial intermediary model for the insurance company. The effect of solvency on efficiency is then examined. These efficiency evaluations are further examined to study stock versus mutual form of organizational structure and agency versus direct marketing arrangements, which are examined separately and in combination.

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

Cherry Picking, Financial Reporting Quality, and Comprehensive Income Reporting Choices: The Case of Property-Liability Insurers

Financial Accounting Standard No. 130 Reporting Comprehensive Income encourages enterprises to report comprehensive income on a performance statement rather than on a statement of equity. We investigate the reporting decisions of 82 publicly traded property-liability insurers, which are fairly evenly split in their choice. We find that insurers with a tendency to manage earnings through realized securities' gains and losses (i.e., cherry pickers), as well as insurers with a reputation for poor financial reporting quality, are more likely to bury comprehensive income in a statement of equity. Apparently, these insurers face the highest cost of transparency. Our findings that insurers' comprehensive income reporting choices are a reflection of their proclivity toward cherry picking as well as their level of financial reporting quality should be of interest to standard setters because of the controversy over standard setters' preference for mandating all firms to report comprehensive income in a performance statement.

Estimating the Cost of Equity Capital for Property-Liability Insurers

This article presents new evidence on the cost of equity capital by line of insurance for the property-liability insurance industry. To do so we obtain firm beta estimates and then use the full-information industry beta (FIB) methodology to decompose the cost of capital by line. We obtain full-information beta estimates using the standard one-factor capital asset pricing model and extend the FIB methodology to incorporate the Fama-French three-factor cost of capital model. The analysis suggests the cost of capital for insurers using the Fama-French model is significantly higher than the estimates based upon the CAPM. In addition, we find evidence of significant differences in the cost of equity capital across lines.

Capital asset pricing models with default risk: Theory and application in insurance

The Capital Asset Pricing Model has been used frequently to derive a fair price of insurance. But the use of this model overestimates insurance premiums because it does not account for the insolvency risk of insurers. This paper examines how the insurance price should be fairly adjusted when insurers' default risk is considered. It develops a model which shows that fair insurance premiums are lower when insurance firms have a positive probability of being insolvent. Using data of property liability insurers during the period from 1943–99, the paper further estimates the effects of the insolvency risk on insurers' underwriting profit rate. It shows that the incorporation of the default risk of insurers in the model, by significantly reducing the required price for insurance, would lead to lower profit potentials. Some writers argue that including the insolvency risk when calculating insurance premiums is not so necessary because of the existence of states' guaranty insurance funds which protect consumers. However, as shown in the paper, these funds have provided inadequate protection to consumers. Therefore, because of the increase in the number of insolvencies in recent years, and because of the limited coverage provided by states' guaranty funds, it seems that considering the insolvency risk in insurance pricing has become very necessary.