Organizational Form in the Property-Liability Insurance Industry

Regan, Laureen; Tzeng, Larry Y.

doi:10.2307/253612

Cited by 47 publications

(55 citation statements)

References 15 publications

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“…The resulting weighted average is normalised by dividing by firm invested assets. 17 For example, Williamson (1985Williamson ( , 1988; Regan and Tzeng (1999); Baranoff and Sager (2003). 18 Baranoff and Sager (2003).…”

Section: Data and Profilesmentioning

confidence: 99%

The Impact of Mortgage-Backed Securities on Capital Requirements of Life Insurers in the Financial Crisis of 2007–2008

Baranoff

Sager

2008

Geneva Pap Risk Insur Issues Pract

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In this paper, we explore U.S. life insurers' exposure to mortgage backed securities (MBS) and its potential impact on capital should the credit ratings of these bonds be lowered. We analyse 2 years: 2003 (well before the realisation of problems with these instruments) and 2006 (immediately prior). We create five potential scenarios of different severity for recategorising MBS credit ratings and compute the theoretical impact on measured insurer asset risk, via a proxy for the C-1 component of life insurers' risk-based capital. Under all scenarios, we find large increases in assessed asset risk. We then model insurer capital structure as a function of asset risk and other factors to assess whether insurers had prepared their capital structures for the possibility of problems with these instruments. Our findings indicate not only that insurers were unprepared for MBS downgrades, but also that they reduced capital as they accumulated MBS, as though acquiring MBS should raise the overall quality of the investment portfolio. Finally, we analyse possible adjustments to capital to accommodate the now recognised increased risks of MBS. Our models suggest, for example, that an insurer with median residential MBS exposure might be expected to increase its capital by 10 per cent or more to maintain a historical relationship between capital and risk factors, in the event of a moderate recategorisation of MBS risk. Even larger adjustments are indicated should the crisis spread to commercial MBS as well.

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Section: Data and Profilesmentioning

confidence: 99%

The Impact of Mortgage-Backed Securities on Capital Requirements of Life Insurers in the Financial Crisis of 2007–2008

Baranoff

Sager

2008

Geneva Pap Risk Insur Issues Pract

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“…The relation between capital structure and asset risk has been examined previously in a simultaneous framework (Cummins and Sommer, 1996;Baranoff and Sager, 2002). Similarly, the relation between organizational form and distribution system has received attention (Regan and Tzeng, 1999). 1 But the four factors of capital structure, asset risk, organizational form, and distribution system have not previously been analyzed as a single integrated set of simultaneously determined decisions.…”

Section: Motivationmentioning

confidence: 99%

The Relations among Organizational and Distribution Forms and Capital and Asset Risk Structures in the Life Insurance Industry

Baranoff

Sager

2003

J of Risk & Insurance

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This article is the first step toward integrating in a single framework two previously separate lines of research on major structural decisions of life insurers. The literature has previously studied the relation between capital structure and asset risk on the one hand, and the relation between organizational form and distribution system on the other hand, without integrating them. Using life insurer data for 1993-1999, we model the four key insurer decisions of capital structure, asset risk, organizational form, and distribution system as endogenous choices in a single interrelated set of simultaneous equations. The model assesses the nature of the interactions among these decisions. The model also assesses the impact of insurers' fundamental business strategy (treated as predetermined) on these choices. The "business-strategy hypothesis" views other key decisions as jointly determined and driven by the fundamental business strategy, once the latter is set in motion. Confirming previous studies, we find a positive relation between capital ratios and asset risk. We also find an association in the simultaneous context between stock ownership and brokerage distribution, which was not found in prior studies. Stock ownership is related to greater financial and asset risk taking, whereas brokerage distribution is associated with lower risk taking. These and other results are interpreted in light of several theories, including transaction-cost economics (TCE), agency theory, and regulatory and bankruptcy cost avoidance. Deriving from these theories, the finite risk paradigm emerges as the most comprehensive interpretation of the results, as opposed to the risk-subsidy hypothesis of the impact of guarantee funds. We also find support for the notion that the business strategy drives the capital and distribution decisions, as predicted by TCE. Copyright The Journal of Risk and Insurance.

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“…We follow the prior literature (e.g., Barrese et al 1995;Regan and Tzeng 1999) and divide P-L insurance businesses into personal auto physical damage and liability insurance (AUTO), homeowners insurance (HOMEOWN), fire (FIRE), commercial multiperils (COMPER), inland marine (INLANDM), ocean marine (OCEAN), allied lines (ALLIED) and workers' compensation (WORKER). The rest of lines are categorized as ''others'' and this category is omitted from the regression model to avoid collinearity.…”

Section: By-line Business Incomementioning

confidence: 99%

Dividend decisions in the property and liability insurance industry: mutual versus stock companies

Zou

Yang

Wang

et al. 2008

Rev Quant Finan Acc

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Organizational Form in the Property-Liability Insurance Industry

Cited by 47 publications

References 15 publications

The Impact of Mortgage-Backed Securities on Capital Requirements of Life Insurers in the Financial Crisis of 2007–2008

The Impact of Mortgage-Backed Securities on Capital Requirements of Life Insurers in the Financial Crisis of 2007–2008

The Relations among Organizational and Distribution Forms and Capital and Asset Risk Structures in the Life Insurance Industry

Dividend decisions in the property and liability insurance industry: mutual versus stock companies

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