Value Creation in the Insurance Industry

Using the insights of current research in corporate finance and financial institutions, the authors briefly present a consistent economic framework for looking at insurance. Shareholders of insurance companies provide risk capital that is invested in financial assets and therefore earns the market return of the assets it is invested in. However, due to the legal and fiscal environment insurance companies are in, they have a competitive disadvantage at investing, and this gives rise to frictional capital costs. The core competence of insurers is in managing the size of these frictional capital costs. Insurers must ensure that they can sell insurance for a price in excess of what they need to produce the cover they sell and compensate the incurred frictional costs on risk capital. It is through the ability to do so that insurers create shareholder value.     

Mortgages and bonds: The asset management practices of Australian life insurers to 1960

Recent studies of the experience of the British life insurance industry indicate that a period of transition, and the development of more diversified investment strategies, began in the interwar period. Australian life insurers lagged behind their British counterparts in the introduction of such strategies. This paper investigates why this was the case. It argues that in the Australian market there was both a lack of opportunity and incentive to broaden asset portfolios. However, this did not mean that asset management practices did not advance. Australian life offices became progressively more sophisticated in their approach to portfolio management during this period. Developments in the interwar period provided a grounding for post-war expansion into the equity market.     

Effizienz und Eigentümerstruktur: Eine empirische Analyse des deutschen Lebensversicherungsmarktes

We provide new insights into the effect of ownership on efficiency by analyzing the German life insurance market over the period 2002–2005. Previous research on alternative organizational forms in the life insurance industry has focused on stock and mutual ownership only. Due to the uniqueness of the German insurance market, where privately-owned companies face competition by public insurers, we add to the recent literature the well known debate on public versus private ownership, by investigating stock, mutual and public ownership forms. Using traditional DEA, we calculate technical efficiency and cost efficiency scores to test the efficient structure hypothesis as well as the expense preference hypothesis. Our results give strong support to the latter, while we find no evidence that public ownership is an efficient corporate structure for life insurers. The group of stock firms dominates both, mutual and public insurers, although differences between stock and mutual companies are smaller than differences between stock and public firms. Analyzing within-group results, our findings suggest that high efficiency scores can be associated with certain firm characteristics which are publicly available: high returns on assets, low cancellation rates and low costs.     

Why haven’t U.S. GAAP and IFRS on insurance contracts converged? Evidence from an unsuccessful joint project

This study examines the FASB’s and IASB’s unsuccessful joint project on accounting for insurance contracts. It highlights the divergent views the Boards may hold on certain fundamental accounting issues. Further, this study examines how the costs and benefits of accounting standard convergence can vary within an industry, conditional on factors such as prior accounting standards and firms’ global operations. Empirically, U.S. insurers’ negative market reactions to the joint insurance project suggest U.S. investors perceived net costs would outweigh net benefits. This study also finds that market reactions of U.S. insurers were more negative than those of European insurers. The results of cross-sectional analyses indicate that U.S. life insurers perceived higher net costs associated with the joint project, while European insurers with more global revenue perceived higher net benefits. This work illuminates some of the challenges facing standard setters when attempting to develop a globally acceptable set of financial reporting standards.     

Performance of the Life Insurance Industry Under Pressure: Efficiency,Competition, and Consolidation

This article investigates efficiency and competition in the Dutch life insurance market by estimating unused scale economies and measuring efficiency‐market share dynamics during 1995–2010. Large unused scale economies exist for small‐ and medium‐sized life insurers, indicating that further consolidation would reduce costs. Over time average scale economies decrease but substantial differences between small and large insurers remain. A direct measure of competition confirms that competitive pressure is lower than in other markets. We do not observe any impact of increased competition from banks, the so‐called investment policy crisis or the credit crisis, apart from lower returns in 2008.     

Market structure and the efficiency of European insurance companies: A stochastic frontier analysis

This paper is motivated by the progressive liberalisation of the European insurance market in recent years. It uses stochastic frontier analysis to estimate Flexible Fourier cost functions for European insurance companies. Separate frontiers are estimated for life, non-life and composite companies. We adopt a maximum likelihood approach to estimation in which the variance of both one-sided and two-sided error terms is modelled jointly with the frontiers. This approach allows us to simultaneously control for the impact of heteroskedasticity on the estimation of scale economies as well as estimating the effect of firm size and market structure on X-inefficiency. The study draws on Standard & Poor’s Eurothesys data set of financial reports for the period 1995 to 2001. This provides technical and non-technical accounts at year-end for life, non-life and composite insurance businesses in 14 major European countries. Our estimates suggest that over this period most European insurers were operating under conditions of decreasing costs (increasing returns to scale), and that company size and domestic market share were significant factors determining X-inefficiency. Larger firms, and those with high market shares, tend to have higher levels of cost inefficiency.     

中国的“影子保险”:来自监管自然实验的证据

影子保险在金融稳定中扮演着重要角色,但现有文献较多关注影子银行,对影子保险关注不足。“影子保险”即保险公司通过再保险方式将保险业务转移给不受监管或者受监管较弱的关联企业的活动,这会推高其真实的杠杆水平,增加金融体系脆弱性。然而,由于影子保险的不透明性和缺少自然实验,现有研究仅基于有限数据或模型给出简单的特征事实或结构性估计,很少能从因果关系上清楚地识别影子保险活动及其机制。本文利用中国加强对中资保险公司(处理组)再保险关联交易监管的政策冲击这一自然实验,使用微观数据和双重差分方法,识别了中国金融体系中的影子保险活动。研究发现,相关监管有效降低了影子保险活动,这一效应对集团公司的影响尤为显著;在机制方面,相关监管通过影响中资保险公司资产负债表两端的结构性调整进而降低了其风险承担行为,提高了经营稳定性。本文方法对识别金融机构的监管套利和防范系统性金融风险具有一定参考意义。     

Systemic risk of insurers around the globe

We study the exposure and contribution of 253 international life and non-life insurers to systemic risk between 2000 and 2012. For our full sample period, we find systemic risk in the international insurance sector to be small. In contrast, the contribution of insurers to the fragility of the financial system peaked during the recent financial crisis. In our panel regressions, we find the interconnectedness of large insurers with the insurance sector to be a significant driver of the insurers’ exposure to systemic risk. In contrast, the contribution of insurers to systemic risk appears to be primarily driven by the insurers’ leverage.     

VOLUNTARY DISCLOSURE BY FINANCIAL INTERMEDIARIES: EVIDENCE FROM AUSTRALIAN LIFE INSURERS PROMOTING INVESTMENT-RELATED CONTRACTS

Voluntary financial disclosure by Australian life insurers promoting investment-related contracts is predicted to be related to fees, funds under management, investment risk and return, liability risk and marketing costs factors. The decision to voluntarily disclose various forms of financial data in documents promoting investment-related contracts was studied during 1989-90. Life insurance managers providing financial disclosures tend to: (a) charge lower fees, (b) hold larger funds under management, (c) are exposed to higher investment risk, (d) are exposed to lower liability risk and (e) bear lower marketing costs. This evidence supports Mayers and Smiths' [1981] positive theory of insurance-related contracting.     

我国人身保险市场结构变化与预测分析

虽然保险业经受了本次金融危机的考验,但是保险业可能成为系统性风险传导链条上的一环,因此,保险监管机构需要转变审慎监管方式,建立适合保险业的宏观审慎监管框架。在这个背景下,对中国人身保险市场结构现状有一个较为清晰和准确的认识就显得十分必要。研究发现:从全国范围来说,我国寿险市场主体数量较少,人身险市场集中度过高,市场结构为寡头垄断,但各地区的人身险市场结构又各有特点,经济发达地区人身险保险市场结构已经过渡到垄断竞争阶段。根据成分数据预测结果分析,在"十二五"期间,我国人身险的市场集中度继续呈下降趋势。     

Stock Market Reactions and Information Transfer Due to Financial Instability in the Life Insurance Industry

ABSTRACT: This study examines the stock market reactions and information transfer effects due to financial instability for four life insurance companies that eventually failed or were taken over by regulators. The four companies were First Executive Corporation, First Capital Holdings Corporation, Monarch Capital Corporation, and Mutual Benefit Life Insurance Company. In general, significant negative capital market responses were found after a company released an announcement regarding financial instability. Information transfer effects of a negative announcement by one insurer were not found to have a significant impact on the other insurers. This study complements past studies of contagion effects within the insurance industry.     

Impact of interest rates on the life insurance market development: Cross-country evidence

Studies have found that interest rates create incentives for insurance firms to focus on financial markets through investments. Using a cross-country context, we conjecture that interest rates affect the life insurance market’s development. Using an initial sample comprising the time series of interest rates and insurance markets’ measures from 34 countries across 1998–2017, we found that the density and penetration of the life insurance market is low in countries with high interest rates. Using another sample of 6,451 observations from insurance firms operating in the same 34 countries, we verified that the financial and operational incomes are equally significant in predicting the net income for life insurance companies that operate in countries with high interest rates. Our study contributes to observations that the lack of governmental control over public expenses impacts interest rates and, thereby, the opportunities for insurers.     

产险公司综合成本率影响要素实证分析

随着我国金融市场的不断开放,风险层面的环境变化、宏观经济及制度环境的变化等都为财产保险的长远发展提供了充分的空间。目前财险行业已经实现承保盈利,但基础并不牢固,国内财险市场已经进入3到5年的硬周期阶段,各大保险公司为了实现企业的可持续发展,需要进一步强化集约化管理和新技术应用,提升成本管控能力,未来需要把成本管控放在相当重要的地位,更加关注综合成本率,控制和降低保险业务成本是保险公司提高核心竞争能力最重要的途径。     

Open‐Market Stock Repurchases by Insurance Companies and Signaling

The signaling hypothesis of share repurchases implies that management uses repurchases to signal either that their firm's future operating performance will improve or that shares of their stock are simply underpriced by the market. This study examines which of the two interpretations can better explain open‐market share repurchase programs announced by insurance companies. We find no evidence that future‐operating performance of insurers improves following the repurchase announcement. In addition, changes in future operating performance cannot explain the announcement‐period abnormal return. Instead, the stock undervaluation prior to the repurchase announcement can significantly explain the announcement‐period abnormal return, particularly for life insurers. Overall, our results suggest that the positive market reaction to insurers’ open‐market share repurchase announcements is due to the stock undervaluation by the market, but not due to positive information content about future operating performance conveyed in the repurchase announcement.     

Adverse Selection in Term Life Insurance Purchasing due to the BRCA1/2 Genetic Test and Elastic Demand

Consumer groups fear that the use of genetic testing information in insurance underwriting might lead to the creation of an underclass of individuals who cannot obtain insurance; thus, these groups want to ban insurance companies from accessing genetic test results. Insurers contend that such a ban might lead to adverse selection that could threaten their financial solvency. To investigate the potential effect of adverse selection in a term life insurance market, a discrete‐time, discrete‐state, Markov chain is used to track the evolution of twelve closed cohorts of women, differentiated by family history of breast and ovarian cancer and age at issue of a 20‐year annually renewable term life insurance policy. The insurance demand behavior of these women is tracked, incorporating elastic demand for insurance. During the 20‐year period, women may get tested for BRCA1/2 mutations. Each year, the insurer calculates the expected premiums and expected future benefit payouts which determine the following year's premium schedule. At the end of each policy year, women can change their life insurance benefit, influenced by their testing status and premium changes. Adverse selection could result from (i) differentiated benefits following test results; (ii) differentiated lapse rates according to test results; and (iii) differentiated reactions to price increases. It is concluded that with realistic estimates of behavioral parameters, adverse selection could be a manageable problem for insurers.     

Strategisches Asset-Liability Management in der Versicherungswirtschaft — Ein Ansatz zur integrierten Bilanzstrukturoptimierung

Asset-Liability Management has gained increased significance within the German insurance industry. This was mainly driven by recent capital market developments. In fact, insurers have encountered challenges to earn given interest guarantees. Regulatory changes also require more sophisticated ALM-tools. Solvency II will change the underlying paradigm and shift balance sheets perception towards a market value oriented view. Especially liabilities will have to be accounted for using the fair value approach. Most ALM-tools appear to be unable to cope with these demands. To improve this current practice, in this paper a Markowitz-approach is employed in order to generate an integrated method for the optimization of assets and liabilities in the life insurance industry. This technique aims to link new regulatory requirements to the latest capital market theory and therefore delivers a procedure for an integrated asset allocation policy in the insurance industry.     

The Economics of Insurance Intermediaries

This article analyzes the economic functions of independent insurance intermediaries (brokers and independent agents), focusing on the commercial property–casualty insurance market. The article investigates the functions performed by intermediaries, the competitiveness of the market, the compensation arrangements for intermediaries, and the process by which policies are placed with insurers. Insurance intermediaries are essentially market makers who match the insurance needs of policyholders with insurers who have the capability of meeting those needs. Intermediary compensation comprises premium‐based commissions, expressed as a percentage of the premium paid, and contingent commissions based on the profitability, persistency, and/or volume of the business placed with the insurer. Empirical evidence is provided that premium‐based and contingent commissions are passed on to policyholders in the premium. However, contingent commissions can enhance competitive bidding by aligning the insurer's and the intermediary's interests. This alignment of interests gives insurers more confidence in the selection of risks and thus helps to break the “winner's curse” and encourages insurers to bid more aggressively. Independent intermediaries also help markets operate more efficiently by reducing the information asymmetries between insurers and buyers that can cause adverse selection.     

The Determinants of Private Debt Holdings: Evidence From the Life Insurance Industry

Life insurers hold the majority of private debt. Lenders in the private debt market must have the ability to evaluate the credit quality of borrowers and to perform ongoing risk monitoring. The purpose of this study is to examine the determinants of private debt holdings in the life insurance industry. The results suggest that larger insurers, insurers with higher financial quality, mutual insurers, publicly traded insurers, insurers facing stringent regulation, and insurers with greater cash holdings are more prevalent lenders in the private debt market.     

Is Historical Cost Accounting a Panacea? Market Stress,Incentive Distortions,and Gains Trading

Accounting rules, through their interactions with capital regulations, affect financial institutions’ trading behavior. The insurance industry provides a laboratory to explore these interactions: life insurers have greater flexibility than property and casualty insurers to hold speculative‐grade assets at historical cost, and the degree to which life insurers recognize market values differs across U.S. states. During the financial crisis, insurers facing a lesser degree of market value recognition are less likely to sell downgraded asset‐backed securities. To improve their capital positions, these insurers disproportionately resort to gains trading, selectively selling otherwise unrelated bonds with high unrealized gains, transmitting shocks across markets.     

Financial Distress in Australian General Insurers

We develop and test a statistical model to identify Australian general insurers experiencing financial distress over the 1999–2001 period. Using a logit model and two measures of financial distress we are able to predict, with reasonable confidence, the insurers more likely to be distressed. They are generally small and have low return on assets and cession ratios. Relative to holdings of liquid assets they have high levels of property and reinsurance assets, and low levels of equity holdings. They also write more overseas business, and less motor insurance and long‐tailed insurance lines, relative to fire and household insurance.