An insurance paradox
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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Volume (Year): 7 (2006)
Issue (Month): 2 (March)
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