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Risk-Based Capital and Firm Risk Taking in Property-Liability Insurance

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  • Jiang Cheng

    () (School of Finance, Shanghai University of Finance and Economics, 777 Guoding Road, Tongde Building 317, Shanghai 200433, China.)

  • Mary A Weiss

    (Risk, Insurance & Healthcare Management Department, Fox School of Business, 1801 Liacouras Walk 6th Floor (006-07), Temple University, Philadelphia, PA 19122, U.S.A.)

Abstract

This research investigates the relationship between capital and risk in property-liability insurers from 1993 to 2007. Three-stage least squares estimation is used to investigate the relationship between capital and two types of risk: underwriting and asset risk. Overall the results suggest that risk and capital are positively related, so that capital increases are associated with increases in investment and underwriting risk. This positive relationship was not consistently significant in 1993, prior to the implementation of risk-based capital (RBC) requirements. Both under-capitalised insurers and marginally adequately capitalised insurers adjusted their capital and risk towards firm targets at a higher speed than well-capitalised insurers in the post-RBC period. But underwriting and asset risk also increased for less well-capitalised insurers.

Suggested Citation

  • Jiang Cheng & Mary A Weiss, 2013. "Risk-Based Capital and Firm Risk Taking in Property-Liability Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 38(2), pages 274-307, April.
  • Handle: RePEc:pal:gpprii:v:38:y:2013:i:2:p:274-307
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