Do Publicly Traded Property–Casualty Insurers Cater to the Stock Market?

Abstract

This article examines the catering theory in the insurance industry. We investigate whether managers of publicly traded insurers pursue a growth strategy catering to the stock market's preference. Two hypotheses are tested in this study: (1) an insurer will devote more efforts to increasing premium growth when the stock market places greater values on growth, and (2) this catering effect will be more pronounced at firms where managers have greater incentives to maximize short-term stock prices. We find evidence supporting both hypotheses. Our study discovers a new channel through which the stock market and executive compensation affect insurance companies' business strategies and the insurance market. The implication of the interplay between insurers and the stock market is significant and deserves future research.

Recent Research Developments Affecting Nonlife Insurance—The CAS Risk Premium Project 2012 Update

“…A particularly important new work is that of Ma and Ren (), which was recommended via the RPP online template. The authors contribute to the understanding of linkages between stock and insurance markets by measuring the sensitivity of both premium growth and relative executive equity compensation to stock prices over the period from 2004 to 2008 and identifying a novel interaction between those variables.…”

Investment Activity of Insurers and the State Economic Growth

“…Many researchers focus their attention on studying the interrelation between the insurer's investment policy, its solvency and state regulation of these aspects of activity. So, Y-L. Ma and Y. Ren (2012) consider the behavior of insurers at high rates of growth of stock indices and determine that in these conditions insurance companies are trying to attract ever larger amounts of funds to their business. At the same time, the influence of state regulation on the investment policy of insurers is taken into account.…”

Get the Balance Right: A Simultaneous Equation Model to Analyze Growth, Profitability, and Safety

“…We use accounting data 10 on a firm-year basis to measure growth, profitability, and safety. In line with the previous literature (Barth & Eckles, 2009;Ma & Ren, 2012;Cole et al, 2015), we measure growth for firm in year by the inflation-adjusted change in gross written premiums, as shown in Equation 1; in robustness tests, we also consider the inflation-adjusted changes in net written premiums and total assets as alternative growth measures.…”