Ownership Structure Changes in the Insurance Industry: An Analysis of Demutualization

This article focuses on the demutualization process and investigates why certain mutuals undergo this organizational structure change. The primary motivation for conversion is access to capital. By statute, mutual firms are limited in their capital‐raising activities while stock firms can attract funds through a variety of stock and debt offerings. By examining the financial characteristics of firms that demutualize, changes in business practices in the years surrounding conversion can be observed. Determinants of the conversion decision are explored through logistic regression. In the years before demutualization, converting property‐liability mutuals exhibit significantly lower surplus‐to‐asset ratios. This capital constraint eases after demutualization. Converting life‐health mutuals hold a significantly lower proportion of liquid assets; in addition, they have a higher proportion of separate accounts under management. This liquidity constraint and increased focus on a higher managerial discretion activity drive the demutualization decision. For both property‐liability and life‐health converting mutuals, support for the access to capital hypothesis is found.     

Corporate Hedging in the Insurance Industry

Abstract

In this paper we investigate the extent to which insurance companies utilize financial derivatives contracts in the management of risks The data set we employ allows us to observe the universe of individual insurer transactions for a class of contracts, namely, those normally thought of as off-balance-sheet (OBS) We provide information on the number of insurers using various types of derivatives contracts and the volume of transactions in terms of notional amounts and the number of counterparties. Life insurers are most active in interest rate and foreign exchange derivatives, while property/casualty insurers tend to be active in trading equity option and foreign exchange contracts Using a multivariate probtt analysis, we explore the factors that potentially influence the existence of OBS activities. We also investigate questions relating to whether certain subsets of OBS transactions (for example, exchange traded) are related to such things as interest rate risk measures, organizational form and other characteristics that may discriminate between desired risk/return profiles across a cross-section of insurers. We find evidence consistent with the use of derivatives by insurers to hedge risks posed by guaranteed investment contracts (GICs), coilater-alized mortgage obligations (CMOs), and other sources of financial risk     

Capitalization of the Property-Liability Insurance Industry: Overview

The 1990s witnessed an unprecedented decline in leverage ratios in the United States property-liability insurance industry. The premiums-to-surplus ratio, the most commonly used leverage ratio in the industry, fell from its historical average of 2.0 to less than 1.0 by the end of 2000; and the industry-wide capital-to-asset ratio increased from an historical average of about 25% to 35%. The international reinsurance industry also experienced significant capital increases and leverage declines during the 1990s (Cummins and Weiss, 2000).¹ These unusual trends raised widespread concerns that the property-liability insurance industry had become over-capitalized (The Economist, 1999; Bowers, 2001; Seifert, 2001). To investigate the growth in capitalization and its potential causes, the Conference on Capitalization in the Property-Liability Insurance Industry was held at the Wharton School in September 2000 under the joint sponsorship of the Wharton Financial Institutions Center and AON. Selected papers from the conference comprise this issue of the Journal of Financial Services Research (JFSR).     

Individual values and household finances

We create individual cultural values measures for households and show that this is an important determinant of their financial behaviour. To date, personal cultural values have only been indirectly measured through religion and trust. But these are, at best, an approximation of true cultural values. Applying a holistic framework from the World Values Survey (WVS), we create individual measures of cultural values, and show that the self-expression values of this framework are positively associated with households’ financial decisions. Examining the individual cultural values that make up the WVS model, we further show that happiness, trust, and playing an active role in society, are individually important determinants of household financial decision-making. Our study shows that cultural values can be brought from a generalized national level to the individual level in order to improve our understanding of household financial decision-making.     

Reinsurance for Natural and Man-Made Catastrophes in the United States: Current State of the Market and Regulatory Reforms

U.S. insurers are heavily dependent on global reinsurance markets to enable them to provide adequate primary market insurance coverage. This article reviews the response of the world's reinsurance industry to recent mega-catastrophes and provides recommendations for regulatory reforms that would improve the efficiency of reinsurance markets. The article also considers the supply of insurance and reinsurance for terrorism and makes recommendations for joint public–private responses to insuring terrorism losses. The analysis shows that reinsurance markets responded efficiently to recent catastrophe losses and that substantial amounts of new capital enter the reinsurance industry very quickly following major catastrophic events. Considerable progress has been made in improving risk and exposure management, capital allocation, and rate of return targeting. Insurance price regulation for catastrophe-prone lines of business is a major source of inefficiency in insurance and reinsurance markets. Deregulation of insurance prices would improve the efficiency of insurance markets, enabling markets to deal more effectively with mega-catastrophes. The current inadequacy of the private terrorism reinsurance market suggests that the federal government may need to remain involved in this market, at least for the next several years.