Corporate Governance and Efficiency: Evidence From U.S. Property–Liability Insurance Industry

This study examines the relation between corporate governance and the efficiency of the U.S. property–liability insurance industry during the period from 2000 to 2007. We find a significant relation between efficiency and corporate governance (board size, proportion of independent directors on the audit committee, proportion of financial experts on the audit committee, director tenure, proportion of block shareholding, average number of directorships, proportion of insiders on the board, and auditor dependence). We also find property–liability insurers have complied with the Sarbanes‐Oxley Act (SOX) to a large extent. Although SOX achieved the goal of greater auditor independence and might have prevented Enron‐like scandals, it had some unexpected effects. For example, insurers became less efficient when they had more independent auditors because the insurers were unable to recoup the benefits of auditor independence.     

Determinants of Corporate Diversification: Evidence From the Property–Liability Insurance Industry

This article analyzes variations in line‐of‐business diversification status and extent among property–liability insurers. Our results show that the extent of diversification is not driven by risk pooling considerations; insurers operating in more volatile business lines do not diversify more. Diversification can rather be explained by the benefits of internal capital markets and barriers to business growth like market size and concentration. In our analysis, we distinguish between related and unrelated diversification. Using a measure of unrelated line‐of‐business diversification we find the first support for the diversification prediction of the managerial discretion hypothesis that mutual insurers should be less diversified than stock insurers. While mutual insurers tend to exhibit higher levels of total diversification, they engage in significantly less unrelated diversification than do stock insurers.     

Effects of Corporate Diversification: Evidence From the Property–Liability Insurance Industry

Using a sample of property–liability insurers over the period 1995–2004, we develop and test a model that explains performance as a function of line‐of‐business diversification and other correlates. Our results indicate that undiversified insurers consistently outperform diversified insurers. In terms of accounting performance, we find a diversification penalty of at least 1 percent of return on assets or 2 percent of return on equity. These findings are robust to corrections for potential endogeneity bias, alternative risk measures, alternative diversification measures, and an alternative estimation technique. Using a market‐based performance measure (Tobin's Q) we find that the market applies a significant discount to diversified insurers. The existence of a diversification penalty (and diversification discount) provides strong support for the strategic focus hypothesis. We also find that insurance groups underperform unaffiliated insurers and that stock insurers outperform mutuals.     

Earnings Smoothing,Executive Compensation,and Corporate Governance: Evidence From the Property–Liability Insurance Industry

Unlike studies that estimate managerial bias, we utilize a direct measure of managerial bias in the U.S. insurance industry to investigate the effects of executive compensation and corporate governance on firms’ earnings management behaviors. We find managers receiving larger bonuses and stock awards tend to make reserving decisions that serve to decrease firm earnings. Moreover, we examine the monitoring effect of corporate board structures in mitigating managers’ reserve manipulation practices. We find managers are more likely to manipulate reserves in the presence of particular board structures. Similar results are not found when we employ traditional estimated measures of managerial bias.     

CEO Turnover and Ownership Structure: Evidence From the U.S. Property–Liability Insurance Industry

This article examines the impact of ownership structure on the relation between firm performance and chief executive officer (CEO) turnover in the U.S. property–liability insurance industry. Theoretical implications of stock versus mutual ownership structures on the performance–turnover relation are ambiguous. Our empirical results indicate that CEO turnover is less responsive to firm underwriting performance in mutual insurers compared to stock insurers. In fact, we find that while CEO turnover for stock firms is negatively related to prior performance, no such relationship is found for mutual insurers. These results hold while controlling for board structure and other relevant factors.     

Managerial Discretion and Corporate Governance in Publicly Traded Firms: Evidence From the Property–Liability Insurance Industry

We study the incremental impact of corporate governance in mitigating managerial discretion, controlling for incentive alignment of managerial ownership. We extend the managerial discretion hypothesis to predict that for firms with the same set of governance tools, those that utilize governance tools more stringently to control agency costs will command greater contracting cost advantages, leading them to specialize in business with greater managerial discretion. Using 72 publicly traded insurers from 1994 to 2006, we find evidence supporting our hypothesis. Our findings complement the finance literature that focuses on the role of financing policies in mitigating agency costs of managerial discretion.     

Corporate Governance and Issues From the Insurance Industry

In this article, we review the literature and empirical research on the nature and consequences of corporate governance. We particularly assess the impact of corporate governance on firm performance and risk taking. While the article analyzes the general literature on corporate governance in publicly listed firms, we also discuss issues pertaining to the insurance industry. The article identifies avenues for future research.     

The Value of Contingent Commissions in the Property–Casualty Insurance Industry: Evidence From Stock Market Returns

Insurance producer compensation has incorporated contingent commissions for decades. In 2004, the New York State Attorney General sued insurers and brokers, alleging compensation abuses and calling for elimination of some forms of contingent commissions. Daily stock price return data reveal negative announcement‐period portfolio returns for property–casualty carriers, suggesting expected negative cash flow effects. Firm‐level losses were related to intensity of contingent commission use, suggesting that the effects of such regulatory changes would be felt most by firms that relied on contingent commissions. Investors believed contingent commissions were valuable not only for producers but also for carriers.     

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.