Risk-Based Capital and Firm Risk Taking in Property-Liability Insurance

Cheng, Jiang; Weiss, Mary A.

doi:10.1057/gpp.2013.2

Cited by 27 publications

(18 citation statements)

References 25 publications

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“…Nevertheless, results overall are in line with the finite risk paradigm as insurers’ capital and risk choices prove to be interdependent and change in the same direction to limit the probability of default . The results in Cheng and Weiss () for US property–liability insurers confirm preceding findings. Moreover, the sample of their paper covers a period before and after the introduction of the risk based capital requirements in the United States.…”

Section: Interactions Between Capital Structure and Business Plans Insupporting

confidence: 76%

Is the Capital Structure Logic of Corporate Finance Applicable to Insurers? Review and Analysis

Dhaene

Hulle

Wuyts

et al. 2015

Journal of Economic Surveys

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Since the financial crisis of 2008, next to banks, insurers have received increasing attention from researchers and regulators because of their crucial role in the financial system. A key point for a stable insurer is its capital structure, i.e. the choice between equity, debt and provisions in financing its operations. Based on earlier work a quickly developing literature has directly applied capital structure theories (in particular trade-off and pecking order) from corporate finance to insurers' financing choices. Corporate finance concepts used herein however, are developed for industrial firms. In this paper we provide an overview of the literature on the capital structure of insurers, but contribute by systematically clarifying how to account for the specificities of insurers when transferring the trade-off and pecking-order logic from an industrial to an insurer context. This way, we add several new insights on an insurer's choice between equity, financial debt and provisions. In particular, we are able to explain why, as compared to industrial firms, insurers use less financial debt, and why insurers focus so strongly on self-financing. Finally, we identify multiple avenues for future research.

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Section: Interactions Between Capital Structure and Business Plans Insupporting

confidence: 76%

Is the Capital Structure Logic of Corporate Finance Applicable to Insurers? Review and Analysis

Dhaene

Hulle

Wuyts

et al. 2015

Journal of Economic Surveys

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show abstract

“…Additionally, larger insurers may need less capital than smaller firms because they normally benefit from economies of scale and scope and have lower financing costs (Bouzouita and Young, ; Adams et al ., ; Caporale et al ., ). Previous studies by Cummins and Nini (), Carayannopoulos and Kelly (), De Haan and Kakes () and Cheng and Weiss (), among others, find that size is negatively and significantly related to insurer capitalisation.…”

Section: Theoretical Background and Hypothesesmentioning

confidence: 90%

“…Nevertheless, although reinsurance is widely used by insurance firms to reduce capital requirements, it exposes them to counterparty risk (Caporale et al ., ), potentially resulting in insurers with higher probabilities of default. Nevertheless, most of the empirical evidence shows an inverse relationship between the use of reinsurance and the insurer's capitalisation (Cummins and Nini, ; Carayannopoulos and Kelly, ; Shiu, ; Cheng and Weiss, ; Mankaï and Belgacem, ; among others)…”

Section: Theoretical Background and Hypothesesmentioning

confidence: 99%

Economic crisis and determinants of solvency in the insurance sector: new evidence from Spain

Moreno

Parrado-Martínez

Trujillo‐Ponce

2018

Accounting & Finance

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This paper analyses the factors that determine the solvency of insurance companies operating in Spain. The selected time span, from 2008 to 2015, encompasses a period of economic instability characterised by record low interest rates and low or even negative economic growth. Using a dynamic panel data model, we conclude that actual solvency margins are positively related to profitability, underwriting risk and a mutual-type organisation but inversely related to size, reinsurance use, longer-tailed business and life insurance specialisation. We also find that less concentrated markets and the context of an economic crisis decrease solvency margins.

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“…RBC is a theoretical minimum or an adequate amount of capital required according to the risk taken by the insurance company in order to support its business activities and minimize insolvency (J. Cheng & Weiss, 2013); (Norazliani Md Lazam, 2012); (Jaaman, Ismail, & Majid, 2007). RBC measures the capital required by individual company based on the size of the firm (related to capital and asset) and the degree of risk taken by each insurer (Pitselis, 2009).…”

Section: Literature On Risk-based Capitalmentioning

confidence: 99%

Risk-Based Capital Framework: Conventional vs. Takaful Operators

Yusof

Lau²,

Osman³

2015

jmr

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Malaysia introduced an RBC framework for its conventional insurance industry in 2009. In 2011, enhancements to the RBC framework were completed. In an effort to improve the overall Takaful regulatory framework, BNM issued new operational and valuation guidelines on 23 September 2010. BNM further issued the draft of risk-based capital (RBC) guidelines for Takaful operators in April 2011 and gathered the industry's feedback (Dhesi, 2012). The proposed Takaful RBC framework appears to be similar to that imposed for a conventional business. Parallel to its counterpart, Takaful operators are obliged to have at least 130% of ISSN 1941-899X 2015 www.macrothink.org/jmr 2 supervisory capital-adequacy ratio (CAR). The minimum CAR imposed is formulated so that Takaful operators have sufficient capital in the shareholders' fund to meet any shortage in Takaful fund. Capital adequacy is a theoretical amount of capital that is required by each insurance company in order to meet payment obligations and support everyday operation without becoming insolvent. The same methodology and assumptions as outlined in the RBC requirements for conventional business have been used to determine each of these capital charges (Dhesi, 2012). However, Conventional insurer and Takaful operators are having different types of risk for their operations (Obaidullah, 1998). Takaful operators also adopt different types of operating models (mudharabah, wakalah and hybrid). The RBC-framework for conventional insurers provides detailed guidelines on the estimation of assets by considering the different types of risks related. Still, the RBC framework for Takaful operators insufficiently addresses the risk that relevant to Takaful operator's activities. The main point that distinguishes Takaful operators and its counterparts is in terms of the sharing of risk with customers. Journal of Management Research

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Risk-Based Capital and Firm Risk Taking in Property-Liability Insurance

Cited by 27 publications

References 25 publications

Is the Capital Structure Logic of Corporate Finance Applicable to Insurers? Review and Analysis

Is the Capital Structure Logic of Corporate Finance Applicable to Insurers? Review and Analysis

Economic crisis and determinants of solvency in the insurance sector: new evidence from Spain

Risk-Based Capital Framework: Conventional vs. Takaful Operators

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