Does one size fit all? Determinants of insurer capital structure around the globe

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

“…To mitigate this bias, we follow Altuntas et al. () by limiting the number of unique U.S. insurance companies in our sample to 42 percent of the total, as this corresponds to the average world market share of U.S. insurers throughout the course of the 2000–2012 period . We randomly select insurance companies from the universe of all U.S. insurers until the total number of U.S. insurers accounts for 42 percecnt of insurance companies in our sample, and we remove all other U.S. insurers from the data set .…”

“…Since our sample contains some countries with observations from just a few insurers, our results might also capture a firm‐ as opposed to country‐level effect in some cases. To ensure that our results are not driven by a small number of insurers from a given country, we drop countries with fewer than 50 firm–year observations from our sample (Altuntas et al., ; Altuntas and Rauch, ). For robustness, we repeat our analyses after excluding countries with fewer than 100 firm–year observations from our sample .…”

“…Insurers exposed to higher underwriting risk also have more uncertain future cash flows than insurers exposed to lower underwriting risk (Lamm‐Tennant and Starks, ). Hence, following the previous literature (Lamm‐Tennant and Starks, ; Adams, ; Altuntas et al., ; Mankaï and Belgacem, ; Altuntas and Rauch, ), we include the standard deviation of insurers’ loss ratio over the sample period in the model . Underwriting risk is measured by the standard deviation of the ratio of net claims incurred to premiums earned.…”

“…On the other hand, if tail length increases risk ex ante and this impairs ex post welfare of policyholders, the insurer may be incentivized to purchase more reinsurance as a way to bond its relationship with policyholders. To empirically measure the relationship between tail length and reinsurance demand, we include long‐tail business , the ratio of the firm's total reserves to its premiums, as an explanatory variable (Altuntas et al., ).…”

“…Altuntas et al. () apply this line of reasoning in their empirical study of how capital structure policies of insurers are shaped by country‐level factors, which cause the costs and benefits of holding capital to vary across countries. In the empirical risk management literature, Fields et al.…”