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An insurance paradox

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Author Info

  • Michael R. Powers

Abstract

Purpose – To consider why the law of large numbers does not play a more significant role in determining an insurer's financial leverage. Design/methodology/approach – Insurer-group data show that there is little relationship between an insurer's premium volume and its overall leverage (i.e. net written premium-to-surplus ratio). An explanation is sought for the lack of a positive scale effect by considering concomitant negative scale effects. Findings – It is argued that insurers frequently convert the benefits of the law of large numbers into economic subsidies for expanded writings that include poorer risks. Originality/value – The editorial identifies and explores a significant scale phenomenon in the insurance sector that is generally overlooked.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Risk Finance.

Volume (Year): 7 (2006)
Issue (Month): 2 (March)
Pages: 113-116

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Handle: RePEc:eme:jrfpps:v:7:y:2006:i:2:p:113-116

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Web page: http://www.emeraldinsight.com

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Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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Web: http://www.emeraldinsight.com/jrf.htm

Related research

Keywords: Gearing; Risk management; Underwriting;

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