Essays in Internal Capital Markets in the U.S. Property-Liability Insurance Industry PDF Download
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Author: Jiyun Lydia Lim
Publisher:
ISBN:
Category :
Languages : en
Pages : 115
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The first part of the dissertation examines whether M&As are related to internal capital markets by analyzing the changes in internal capital market utilization following M&As in the U.S. property-liability insurance industry during the period 2000-2015. The results suggest that both acquiring insurers and targets increase internal reinsurance and undergo more intragroup capital transactions after the M&A. The probit analysis provides evidence that insurers with low internal capital market utilization via reinsurance are more likely to engage in M&As as an acquirer or a target. This indicates that acquiring insurers with small internal capital markets have an incentive in making acquisitions to expand their internal capital markets. This study finds empirical evidence that internal capital market use is one of the determinants of M&As by utilizing internal transaction data of U.S. property-liability insurers. The second part of the dissertation investigates the relationship between executive compensation and internal capital market efficiency in the U.S. property-liability insurance industry for the period 2000-2015. The results indicate that executive compensation has a significant and positive influence on the efficiency of internal capital allocation. An executive's incentive for efficient internal capital allocation is different depending on the type of compensation, the size of internal capital markets, and external events such as the global financial crisis. These findings are robust to corrections for potential endogeneity bias. I also find evidence of a non-linear relationship between efficiency and the size of internal capital markets. Internal capital markets should continue to expand as long as the benefit of relaxing credit constraints is greater than the cost of managing larger internal capital markets. Overall, the result of the study is consistent with the view that better alignment of executive incentives with shareholder interests leads to efficient internal capital allocation.
Author: Jiyun Lydia Lim
Publisher:
ISBN:
Category :
Languages : en
Pages : 115
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Book Description
The first part of the dissertation examines whether M&As are related to internal capital markets by analyzing the changes in internal capital market utilization following M&As in the U.S. property-liability insurance industry during the period 2000-2015. The results suggest that both acquiring insurers and targets increase internal reinsurance and undergo more intragroup capital transactions after the M&A. The probit analysis provides evidence that insurers with low internal capital market utilization via reinsurance are more likely to engage in M&As as an acquirer or a target. This indicates that acquiring insurers with small internal capital markets have an incentive in making acquisitions to expand their internal capital markets. This study finds empirical evidence that internal capital market use is one of the determinants of M&As by utilizing internal transaction data of U.S. property-liability insurers. The second part of the dissertation investigates the relationship between executive compensation and internal capital market efficiency in the U.S. property-liability insurance industry for the period 2000-2015. The results indicate that executive compensation has a significant and positive influence on the efficiency of internal capital allocation. An executive's incentive for efficient internal capital allocation is different depending on the type of compensation, the size of internal capital markets, and external events such as the global financial crisis. These findings are robust to corrections for potential endogeneity bias. I also find evidence of a non-linear relationship between efficiency and the size of internal capital markets. Internal capital markets should continue to expand as long as the benefit of relaxing credit constraints is greater than the cost of managing larger internal capital markets. Overall, the result of the study is consistent with the view that better alignment of executive incentives with shareholder interests leads to efficient internal capital allocation.
Author: Zhen Liu
Publisher:
ISBN:
Category :
Languages : en
Pages : 151
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Book Description
The first part of the dissertation investigates cost experience in the US life and health insurance industry over the period 1998-2012. We generally test the difference in expenses among different distribution systems, which mainly consists of independent agency, broker, career agency, exclusive agency, and direct writing. We check to see if cost, revenue and profit efficiency differences are associated with different distribution methods. Cost, revenue, and profit efficiencies are estimated by Data Envelopment Analysis. Unlike the results in the property and liability insurance industry, the cost difference is insignificant among distribution systems. Results on cost efficiency and revenue efficiency support the market imperfection hypothesis, which says that the market imperfections such as entry barriers, price regulation, or search costs cause the coexistence of different distribution systems. The second part of the dissertation examines the relationship between mergers and acquisitions (M&As), and underwriting cycles in the P-L insurance industry. In a soft market, capital is relatively high. This leads to an increase in the number of M&A transactions and the probability that managers conduct non-value-increasing M&As. We test this proposition by analyzing the associations between volumes of M&A deals, and returns associated with M&As and underwriting cycle. The results show that the numbers of M&As are negatively related with the premium rate changes and positively related with changes in the combined ratio. We also find that the cumulative abnormal returns around the announcement date of M&As are smaller for the shareholders of insurer acquirers in a soft market. Even more, we find that the market reaction of M&As is less sensitive to agency problems in a hard market than in a soft market.
Author: Rui Ju
Publisher:
ISBN:
Category :
Languages : en
Pages : 118
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This dissertation consists of two topics. Chapter 1 examines the relationship between contingent commission use and underwriting performance as well as underwriting risk using data from 2005 to 2016. Top brokers were banned from receiving contingent commissions following the inquiry in 2004 led by Eliot Spitzer, former New York Attorney-General. But the ban raised concerns about whether it created a level playing field across the industry, as smaller brokers continued taking them. In addition, despite the possible conflicts of interest, contingent commissions have also been recognized as a way to better align agent and insurer incentives. Regulators agreed to relax the terms for the leading brokers in 2010, resulting in a less onerous compliance regime for contingent commission use. It is important to study the effectiveness of contingent commission use on improving underwriting performance. This study finds strong evidence supporting the hypothesis that contingent commissions' usage is associated with better underwriting performance as well as lower underwriting risk. This study also finds a curvilinear relationship between underwriting performance and the level of contingent commission use. Chapter 2 investigates the impact of executive overconfidence on capital structure decisions and reinsurance purchases using a sample of 37 publicly-traded property-liability insurance groups for the period 2002 to 2016. This study finds that insurance firms with overconfident executives have significantly higher leverage ratios than those without overconfident executives. This study also finds evidence that insurance firms with overconfident executives cede more reinsurance, and this evidence is stronger for insurers with more limited business capacity than those with ample business capacity. The results of this study also indicate that overconfident executives prefer internal reinsurance to external reinsurance. This research provides evidence that personality traits of executive impact capital structure decisions and reinsurance purchases for insurance firms, which should be of interest to policyholders and regulators.
Author: Jiang Cheng
Publisher:
ISBN:
Category : Insurance
Languages : en
Pages : 336
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Author: Gregory P. Nini
Publisher:
ISBN:
Category :
Languages : en
Pages : 183
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Author: Lawrence S. Powell
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ISBN:
Category :
Languages : en
Pages : 32
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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.
Author: Yingrui Lu
Publisher:
ISBN:
Category :
Languages : en
Pages : 137
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This dissertation includes two chapters. In Chapter 1, "Information Risk and the Cost of Equity Capital Revisited: Evidence from the U.S. Property-Casualty Insurance Industry", I revisit the relationship between information risk and the cost of equity capital in the U.S. property-casualty (P-C) insurance industry. Eckles, Halek and Zhang (2014) find that information risk has no effect on the cost of equity using a sample of U.S. P-C insurers. Following their approach, we decompose information risk into innate and discretionary components. I find that innate information risk affects the cost of equity capital through two opposing channels. On the one hand, innate information risk directly increases an insurer's cost of equity capital by increasing investors' assessment of the riskiness of the insurer's future cash flows. On the other hand, innate information risk indirectly decreases the insurer's cost of equity capital by changing its production so that the assessed riskiness of the firm's future cash flows are reduced. This (negative) indirect effect depends on factors that influence the insurer's underwriting decisions. My empirical results provide supporting evidence for a significant, positive direct effect of innate information risk, while the magnitude of the (negative) indirect effect increases with the insurer's proportion of long-tail business and decreases with its affiliated reinsurance usage. As to the impact of discretionary information risk, my results are mixed. I also find that, on average, the overall effect of information risk on the cost of equity capital for property-casualty insurers is significant and negative. In Chapter 2, "Coordination of Capital, Earnings, and Taxes in the U.S. Property-Casualty Insurance Industry", I investigate how property-casualty (P-C) insurers manage discretionary tools to achieve regulatory capital, earnings, and tax planning goals. I examine one accrual tool, loss reserve errors, together with two real transaction tools: realized capital gains (losses) from investment sales, and capital contributions. I find that when P-C insurers have lower pre-managed capital levels, managers will report income-increasing loss reserve errors, recognize more realized capital gains and receive more capital contributions. When P-C insurers have lower pre-managed earnings, managers will report income-increasing loss reserve errors. When P-C insurers have higher marginal tax rates, managers will report income-decreasing loss reserve errors and recognize more realized capital losses. Moreover, I analyze the effect of ownership structures on the degree of managerial discretion for various reporting goals. My analysis includes three different types of ownership structures: public, private stock and mutual firms. I find that, through the use of capital contributions, public firms are more aggressive in capital management, while mutual firms are less aggressive in capital management than private stock firms. In terms of using the other two tools, compared to private stock firms, public firms do not manage capital less aggressively; they do not manage earnings more aggressively; they do not manage taxes less aggressively. Compared to private stock firms, mutual firms are less aggressive in capital management; they are more aggressive in earnings management; they are less aggressive in tax management.
Author: Yuan Du
Publisher:
ISBN:
Category :
Languages : en
Pages : 80
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This dissertation consists of two chapters. Chapter 1 focuses on the barriers that diversifying companies could face and explore how barriers to entry differ across different types of entry. Chapter 2 turns the attention to the market competition among insurance companies that are already in a market and examines how product bundling impact insurers' market power. Chapter 1 proposes and estimates a multi-agent model of entry. The prior literature often treats the number of companies in a market as an exogenous measure of market structure. However, the number of companies is endogenously decided by the market structure and other participants. Thus, I propose a structural model of entry to address the endogenous entry decision. In addition, the estimations are conducted at each market-year level, therefore, it provides an opportunity to delineate the relative importance of barriers to entry across three dimensions: geographic, product, and time. I find that barriers to entry exist in the financial services industry, and can be quite substantial to the \textit{de novo} entrants. Overall, I find \textit{de novo} entrants are the ones most subject to barriers to entry across all markets. Expanding within a state is as costly as expanding within a product line. Upon further examination, I discover that product-specific knowledge, such as underwriting expertise, pricing schemes, and coverage designs, plays a critical role in a successful expansion. This information is also relatively more important than state-specific connections, such as how well the company knows its customers and connections with distribution channels. Among all product lines, I find that expertise in mortgage guaranty insurance creates the most barriers, and these barriers are most subject to impacts of the financial crisis. In Chapter 2, I turn the focus to the market competition \emph{within} a market and explore the impact of product bundling on market power. Product bundling is a popular way for companies to retain their customers and keep up with fast-changing market demand. In this chapter, I will specifically examine the impact of bundling on price elasticity for personal lines of insurance. Insurance demand estimation is well-explored in the literature because it is difficult to obtain individual-level data. I overcome this hurdle by using a random coefficients logit model, which incorporates flexible consumer preferences over companies' characteristics. The second difficulty in insurance demand estimation is that it is hard to find a good instrument for the endogenous price. Therefore, I propose a novel instrument, which exploits an idiosyncrasy in insurance tax laws for identification. I find that bundling, on average, can reduce consumers' price sensitivity. Thus, companies that can offer bundle-able products experience a less elastic demand and achieve market power. However, product bundling has differential impacts on the auto insurance and homeowners' insurance markets. Auto insurers that offer bundled packages experience less elastic demand in response to price increases. However, we do not observe similar patterns in the homeowners' insurance market, where doing so intensifies price elasticity. With a closer examination, we discover that the different valuation in homeowners is not driven by the financial ratings of insurers. This indicates that homeowners tend to value other characteristics, such as claims management and the quality of service, more than just price of the contract.
Author: ZHIJIAN FENG
Publisher:
ISBN:
Category :
Languages : en
Pages : 128
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This dissertation investigates the relationships between reinsurance activities and primary insurers' financial performance in U.S. property-liability insurance market from several perspectives. The first essay investigates the relationship between ceding insurer performance and the affiliation, domicile, and authorization of its counterparties. Specifically, we provide empirical evidence that ceding insurer financial performance is positively related to the use of affiliated reinsurance, the use of foreign reinsurance, and the use of affiliated reinsurance that is ceded to the low-tax, lightly-regulated domiciled counterparties; and negatively related to the use of unauthorized reinsurance. These results are consistent with the cost of information asymmetry theory. The second essay investigates reinsurance counterparty relationships in U.S. property-liability insurance. Firm-specific characteristics determinants of counterparty relationships are examined. We also analyze the relationship between firm performance and reinsurance counterparty relationships. We find that concentration in reinsurance counterparties, especially in unaffiliated counterparties, is adversely related to insurer performance due to higher information asymmetry. On the other hand, relationship with foreign counterparties is positive related to performance, suggesting the foreign reinsurers may have a favorable position in terms of tax treatment, specialized service, among other factors.
Author: Shuang Yang
Publisher:
ISBN:
Category :
Languages : en
Pages : 99
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This dissertation consists of two topics. Chapter 1 explores the relationship between U.S. Property-Casualty (P/C) insurers' underwriting risk, investment risk, and leverage risk, using data from 1998 to 2013. I test the trade-off hypothesis using a simultaneous equation model framework with partial adjustment effects. The three equations model intend to examine the interrelations between insurers' leverage and two measures of firm risks: underwriting risk and investment risk. The empirical evidence, various to different sample periods and model specifications, suggests there is no significant relationship existing between insurers' underwriting risk and investment risk. But these two types of risks are both significantly and negatively related to the leverage ratio. The overall results imply that insurers tend to tradeoff leverage risk and underwriting risk/investment risk, but it appears that they have not taken an integrated approach between the total level of underwriting risk and investment risk yet. The second part of this dissertation empirically investigates the impact of credit risk on insurers' reinsurance demand, using data on the U.S. P/C insurance industry from 2000 to 2014. I mainly explore how insurers' credit rating status and downgrade risk affects their reinsurance demand. Using a two-stage least square (2SLS) regression model, I find that low-rated insurers are associated with a higher utilization of reinsurance. In addition, insurers that are downgraded in the previous year tend to have a higher reinsurance demand than the others. Results also show that downgraded group-affiliated insurers tend to significantly increase their internal reinsurance demand from the group-affiliated members while decreasing the purchase of external reinsurance significantly. In general, I find that insurers' reinsurance demand is affected by their credit rating and downgrade risk.
