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Journal ArticleDOI

The Impact of Firm Risk on Property-Liability Insurance Prices

01 Sep 1996-Journal of Risk and Insurance-Vol. 63, Iss: 3, pp 501
TL;DR: In this paper, the authors examined the impact of an insurer's level of insolvency risk on the prices the insurer obtains for its products in the property-liability insurance market.
Abstract: This article examines the impact of an insurer's level of insolvency risk on the prices the insurer obtains for its products in the property-liability insurance market. The measures of insolvency risk used are those implied by the option pricing model of insurance. The key finding is the existence of a negative relation between insolvency risk and insurance prices. This implies that property-liability insurers are penalized for default risk through lower prices, despite the existence of guaranty funds. Other firm-specific determinants of insurance prices are also identified. The results have significant implications for insurance researchers and regulators.
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Posted Content
TL;DR: In this paper, the authors find evidence of a positive relation between increasing levels of traditional risk management capability and firm value but no additional increase in value for firms achieving a higher ERM rating.
Abstract: Enterprise Risk Management (ERM) has emerged as a construct that ostensibly overcomes limitations of silo-based traditional risk management (TRM), yet little is known about its effectiveness. The scant research on the relationship between ERM and firm performance has offered mixed findings, and has been limited by the lack of a suitable proxy for the degree of ERM implementation. Using Standard and Poor’s (S&P) newly available risk management rating, we find evidence of a positive relation between increasing levels of TRM capability and firm value but no additional increase in value for firms achieving a higher ERM rating. Considering these results, we suggest directions for future research.

277 citations


Additional excerpts

  • ...Sommer, D. W. (1996)....

    [...]

Journal ArticleDOI
TL;DR: This paper found significant differences in reputation across three identified strategic groups of U.S. property/casualty insurers, supporting their contention that reputation is a multilevel concept. But they did not consider the relationship between strategic group membership and reputation.
Abstract: While most strategic group research has focused on performance implications, we consider the relationship between strategic group membership and reputation. Using strategic group identity and domain consensus concepts, we propose strategic groups have different reputations. We find significant differences exist in reputation across three identified strategic groups of U.S. property/casualty insurers, supporting our contention that reputation is a multilevel concept. Post hoc analyses suggest strategic groups with higher reputation also have higher performance on some critical measures, indicating reputation may be a mobility barrier beneficial to members of certain groups. Practitioner implications include challenges of within-group differentiation in firm reputation. Copyright © 2000 John Wiley & Sons, Ltd.

226 citations

Journal ArticleDOI
TL;DR: In this article, the effectiveness of enterprise risk management (ERM) has been investigated and little is known about its effectiveness, except that it is a construct that overcomes limitations of silo-based traditional risk management.
Abstract: Enterprise risk management (ERM) has emerged as a construct that ostensibly overcomes limitations of silo-based traditional risk management (TRM), yet little is known about its effectiveness. The s...

225 citations

Journal ArticleDOI
TL;DR: This paper investigated the use of capital by insurers to provide evidence on whether the capital increase represents a legitimate response to changing market conditions or a true inefficiency that leads to performance penalties for insurers.
Abstract: Capitalization levels in the property-liability insurance industry have increased dramatically in recent years—the capital-to-assets ratio rose from 25% in 1989 to 35% by 1999. This paper investigates the use of capital by insurers to provide evidence on whether the capital increase represents a legitimate response to changing market conditions or a true inefficiency that leads to performance penalties for insurers. We estimate “best practice” technical, cost, and revenue frontiers for a sample of insurers over the period 1993–1998, using data envelopment analysis, a non-parametric technique. The results indicate that most insurers significantly over-utilized equity capital during the sample period. Regression analysis provides evidence that capital over-utilization primarily represents an inefficiency for which insurers incur significant revenue penalties.

213 citations

Posted Content
TL;DR: In this paper, the authors find empirical evidence that insurers who have more balanced business in life and annuity risks also tend to charge lower premiums than otherwise similar insurers. And they show how a mortality swap might be used to provide the benefits of natural hedging.
Abstract: The values of life insurance and annuity liabilities move in opposite directions in response to a change in the underlying mortality. Natural hedging utilizes this to stabilize aggregate liability cash flows. We find empirical evidence that suggests that annuity writing insurers who have more balanced business in life and annuity risks also tend to charge lower premiums than otherwise similar insurers. This indicates that insurers who have a natural hedge have a competitive advantage. In addition, we show how a mortality swap might be used to provide the benefits of natural hedging.

191 citations

References
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Journal ArticleDOI
TL;DR: The Elements of Econometrics as mentioned in this paper is a textbook for upper-level undergraduate and master's degree courses and may usefully serve as a supplement for traditional Ph.D. courses in economics.
Abstract: This classic text has proven its worth in university classrooms and as a tool kit in research--selling over 40,000 copies in the United States and abroad in its first edition alone. Users have included undergraduate and graduate students of economics and business, and students and researchers in political science, sociology, and other fields where regression models and their extensions are relevant. The book has also served as a handy reference in the "real world" for people who need a clear and accurate explanation of techniques that are used in empirical research.Throughout the book the emphasis is on simplification whenever possible, assuming the readers know college algebra and basic calculus. Jan Kmenta explains all methods within the simplest framework, and generalizations are presented as logical extensions of simple cases. And while a relatively high degree of rigor is preserved, every conflict between rigor and clarity is resolved in favor of the latter. Apart from its clear exposition, the book's strength lies in emphasizing the basic ideas rather than just presenting formulas to learn and rules to apply.The book consists of two parts, which could be considered jointly or separately. Part one covers the basic elements of the theory of statistics and provides readers with a good understanding of the process of scientific generalization from incomplete information. Part two contains a thorough exposition of all basic econometric methods and includes some of the more recent developments in several areas.As a textbook, "Elements of Econometrics" is intended for upper-level undergraduate and master's degree courses and may usefully serve as a supplement for traditional Ph.D. courses in econometrics. Researchers in the social sciences will find it an invaluable reference tool.A solutions manual is also available for teachers who adopt the text for coursework.Jan Kmenta is Professor Emeritus of Economics and Statistics, University of Michigan.

3,838 citations

Book
01 Jan 1971
TL;DR: The emphasis is on simplification whenever possible, assuming the readers know college algebra and basic calculus, and Jan Kmenta explains all methods within the simplest framework, and generalizations are presented as logical extensions of simple cases.
Abstract: This classic text has proven its worth in university classrooms and as a tool kit in research--selling over 40,000 copies in the United States and abroad in its first edition alone. Users have included undergraduate and graduate students of economics and business, and students and researchers in political science, sociology, and other fields where regression models and their extensions are relevant. The book has also served as a handy reference in the "real world" for people who need a clear and accurate explanation of techniques that are used in empirical research.Throughout the book the emphasis is on simplification whenever possible, assuming the readers know college algebra and basic calculus. Jan Kmenta explains all methods within the simplest framework, and generalizations are presented as logical extensions of simple cases. And while a relatively high degree of rigor is preserved, every conflict between rigor and clarity is resolved in favor of the latter. Apart from its clear exposition, the book's strength lies in emphasizing the basic ideas rather than just presenting formulas to learn and rules to apply.The book consists of two parts, which could be considered jointly or separately. Part one covers the basic elements of the theory of statistics and provides readers with a good understanding of the process of scientific generalization from incomplete information. Part two contains a thorough exposition of all basic econometric methods and includes some of the more recent developments in several areas.As a textbook, "Elements of Econometrics" is intended for upper-level undergraduate and master's degree courses and may usefully serve as a supplement for traditional Ph.D. courses in econometrics. Researchers in the social sciences will find it an invaluable reference tool.A solutions manual is also available for teachers who adopt the text for coursework.Jan Kmenta is Professor Emeritus of Economics and Statistics, University of Michigan.

3,096 citations

Journal ArticleDOI
TL;DR: In this article, the authors provide a foundation for a positive theory of insurance contracting with examples of its testable predictions and argue that incentive conflicts arise when discretionary action is authorized and that contractual provisions and organizational structures control sources of conflict within the insurance market.
Abstract: We provide a foundation for a positive theory of insurance contracting with examples of its testable predictions. We argue that incentive conflicts arise when discretionary action is authorized and that contractual provisions and organizational structures control sources of conflict within the insurance market. Our emphasis differs from much of the previous insurance analysis. We focus on the implications of cost differences across insurance lines in the contracting/control technology. Our analysis yields testable implications about the distribution and contractual provisions (such as upper limits, deductibles, and coinsurance) and organizational structures (such as Lloyd's Associations, mutuals, and stocks) across lines of insurance.

428 citations

Journal ArticleDOI
TL;DR: In this article, the authors developed a model of price determination in insurance markets, which predicts that the price of insurance, measured by the ratio of premiums to discounted losses, is inversely related to insurer default risk.

347 citations

Journal ArticleDOI
TL;DR: In this paper, the authors provide empirical tests of the risk differences between two types of ownership structure in the property-liability insurance industry and provide empirical evidence that suggests stock insurers have more risk than mutuals where the risk inherent in future cash flows is proxied by the variance of the loss ratio.
Abstract: This article provides empirical tests of the risk differences between two types of ownership structure in the property-liability insurance industry. Empirical evidence is provided that suggests stock insurers have more risk than mutuals where the risk inherent in future cash flows is proxied by the variance of the loss ratio. Further evidence suggests that stock insurers write relatively more business than do mutuals in lines and states having higher risk. Copyright 1993 by University of Chicago Press.

337 citations