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The Corporate Demand for Insurance: A Strategic Perspective

Author

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  • S G Ashby

    (Sheffield Hallam University)

  • S R Diacon

    (University of Nottingham)

Abstract

The purpose of this paper is to discuss the possibility that decisions on corporate insurance purchases may have a strategic dimension. The conventional literature has focused on the ability of insurance to add value to the firm by limiting the impact of risk on risk averse stakeholders or reducing the cost of such risk. The key argument in this paper is that, under certain circumstances, the corporate demand for insurance may be motivated by a company's strategic decisions on output and price risk. Most real world markets are characterised by small numbers of relatively large firms which compete with each other strategically. By focusing on such oligopolistic markets, we reveal that this interdependency between firms means that insurance and risk management can also have a strategic consequence. The strategic behaviour of the firm may influence risk management in general, and the corporate purchase of insurance in particular, in three main ways: first, the strategic nature of competition may provide an incentive for even risk neutral firms to control risk ; secondly the firm's risk control decisions cannot be made in isolation but will depend on the actions of its rivals, and thirdly insurance (as opposed to other risk control mechanisms) may play a role in facilitating cooperation or coordination between competing firms for their mutual benefit.

Suggested Citation

  • S G Ashby & S R Diacon, 1998. "The Corporate Demand for Insurance: A Strategic Perspective," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 23(1), pages 34-51, January.
    • Handle: RePEc:pal:gpprii:v:23:y:1998:i:1:p:34-51
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    Citations

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    Cited by:

    1. André P. Liebenberg & Robert E. Hoyt, 2003. "The Determinants of Enterprise Risk Management: Evidence From the Appointment of Chief Risk Officers," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 6(1), pages 37-52, February.
    2. Giorgio Stefano Bertinetti & Elisa Cavezzali & Gloria Gardenal, 2013. "The effect of the enterprise risk management implementation on the firm value of European companies," Working Papers 10, Department of Management, Università Ca' Foscari Venezia.
    3. Tobias Götze & Marc Gürtler, 2022. "Risk transfer beyond reinsurance: the added value of CAT bonds," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(1), pages 125-171, January.
    4. Bender, Klaus & Richter, Andreas, 2002. "Optimales Vertragsdesign bei moralischem Risiko in der Rückversicherung," Working Papers on Risk and Insurance 9, University of Hamburg, Institute for Risk and Insurance.
    5. Vincent Y. Chang, 2019. "Does reinsurance purchasing enhance insurers’ competitiveness? Evidence from the U.S. property–liability insurance industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 44(4), pages 595-623, October.
    6. Adams, Mike & Hillier, David, 2000. "The effect of captive insurer formation on stock returns: An empirical test from the UK," Journal of Banking & Finance, Elsevier, vol. 24(11), pages 1787-1807, November.

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