Explaining variation in risk across insurance companies

The purpose of this study is to determine what firm-specific factors affect the risk of insurance companies. Traditional methods used to identify potential failures have been severely criticized. Thus, alternative approaches to risk assessment should be of interest to investors and managers of these companies. Models for measuring the impact of factors on risk are developed and empirically tested. The models employed explain a high proportion of variation in risk levels across companies. The sensitivity of insurance company risk to financial characteristics vary with the variable used as a proxy for risk and the type of insurance company assessed. Given the strong relationships between firm-specific characteristics and company risk, it appears that the risk of insurance companies can be effectively controlled with proper management.