Insurer Risk Management and Shareholder Wealth
42 Pages Posted: 2 Sep 2007 Last revised: 9 Feb 2008
Date Written: January 1, 2008
Abstract
We derive the financial market return implications of a number of models of an insurer faced with different regulatory regimes and differing access to financial markets for added capital. If insurers have unhindered access to financial markets and insurance regulation requires an immediate capital contribution to offset a capital deficit, then capital volatility has no impact on insurer equity market returns. In an unregulated insurance market, regardless of access to financial markets, greater volatility reduces expected insurer equity market returns. Finally, in a regulated and capital constrained insurance market, where transactions costs prevent insurers from obtaining financial market capital contributions, greater capital volatility increases expected insurer equity market returns. In empirical testing, we find that volatility decreases the equity market returns of property-liability insurers. This result is consistent with imperfect insurance regulation and policyholders who bear the risk of insurer financial distress with incomplete compensation. In this environment, insurer risk management decreases shareholder wealth because it decreases the likelihood that insurers share financial distress with policyholders.
Keywords: risk management, insurance, regulation
JEL Classification: G22
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
There is a Risk-Return Tradeoff after All
By Pedro Santa-clara, Eric Ghysels, ...
-
There is a Risk-Return Tradeoff after All
By Eric Ghysels, Pedro Santa-clara, ...
-
The Equity Premium and Structural Breaks
By Lubos Pastor and Robert F. Stambaugh
-
By Qiang Kang and Michael W. Brandt
-
A Markov Model of Heteroskedasticity, Risk, and Learning in the Stock Market
By Christopher M. Turner, Richard Startz, ...
-
Uncovering the Risk-Return Relation in the Stock Market
By Hui Guo and Robert Whitelaw