Risk-based capital and firm risk taking in property-liability insurance

Jiang CHENG, Mary A. WEISS

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

10 Citations (Scopus)

Abstract

This research investigates the relationship between capital and risk in property-liability insurers from 1993 to 2007. Three-stage least squares estimation is used to investigate the relationship between capital and two types of risk: underwriting and asset risk. Overall the results suggest that risk and capital are positively related, so that capital increases are associated with increases in investment and underwriting risk. This positive relationship was not consistently significant in 1993, prior to the implementation of risk-based capital (RBC) requirements. Both under-capitalised insurers and marginally adequately capitalised insurers adjusted their capital and risk towards firm targets at a higher speed than well-capitalised insurers in the post-RBC period. But underwriting and asset risk also increased for less well-capitalised insurers.
Original languageEnglish
Pages (from-to)274-307
Number of pages34
JournalThe Geneva Papers on Risk and Insurance : Issues and Practice
Volume38
Issue number2
Early online date8 Apr 2013
DOIs
Publication statusPublished - Apr 2013
Externally publishedYes

Fingerprint

Risk-based capital
Property-liability insurance
Firm risk
Risk taking
Insurer
Underwriting
Assets
Property-liability insurers
Three-stage least squares
Capital requirements

Bibliographical note

Jiang Cheng gratefully acknowledges the financial support from the Scientific Research Foundation for the Returned Overseas Chinese Scholars (Grant #2012940) and the Specialized Research Fund for the Doctoral Program of Higher Education (New Teachers Grant #Z1025420) of the Ministry of Education of China.

Keywords

  • capital
  • regulatory effect
  • risk
  • risk-based capital

Cite this

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Risk-based capital and firm risk taking in property-liability insurance. / CHENG, Jiang; WEISS, Mary A.

In: The Geneva Papers on Risk and Insurance : Issues and Practice, Vol. 38, No. 2, 04.2013, p. 274-307.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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AU - WEISS, Mary A.

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AB - This research investigates the relationship between capital and risk in property-liability insurers from 1993 to 2007. Three-stage least squares estimation is used to investigate the relationship between capital and two types of risk: underwriting and asset risk. Overall the results suggest that risk and capital are positively related, so that capital increases are associated with increases in investment and underwriting risk. This positive relationship was not consistently significant in 1993, prior to the implementation of risk-based capital (RBC) requirements. Both under-capitalised insurers and marginally adequately capitalised insurers adjusted their capital and risk towards firm targets at a higher speed than well-capitalised insurers in the post-RBC period. But underwriting and asset risk also increased for less well-capitalised insurers.

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