This study examines the impact of organizational structure and board composition on risk taking in the U.S. property casualty insurance industry, addressing different risk‐taking behaviors from different perspectives. The risk‐taking measures include total risk, underwriting risk, investment risk, and leverage risk. The evidence shows that mutual insurers have lower total risk, underwriting risk, and investment risk than stock insurers. In terms of board composition variables, we find that some board composition variables not only have impact on risk‐taking behaviors but also affect different risk measures differently. Thus, using different risk measures is better than using one risk measure to assess risk‐taking behavior. Finally, we conclude that an insurer can control its total risk through management of underwriting, investment, and leverage risks that determine an insurer's risk profile.

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.

This study examines the impact of organizational structure on firm performance, incentive problems, and financial decisions in the Japanese nonlife (property-casualty) insurance industry. Stock companies that belong to one of six horizontal keiretsu groups have lower expenses and lower levels of free cash flow than independent stock and mutual insurance companies. Keiretsu insurers also have higher profitability and higher loss ratios than independent insurers. With a limited sample size, there is some evidence that mutual insurers have higher levels of free cash flows, higher investment incomes, and lower financial leverage than their stock counterparts. Overall, empirical evidence suggests that each structure has its own comparative advantage. Copyright The Journal of Risk and Insurance.

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This article uses the nonparametric frontier method to examine differences in efficiency for three unique organizational forms in the Japanese nonlife insurance industry-keiretsu firms, nonspecialized independent firms (NSIFs), and specialized independent firms (SIFs). It is not possible to reject the null hypothesis that efficiencies are equal, with one exception. Keiretsu firms seem to be more cost-efficient than NSIFs. The results have important implications for the stakeholders of the NSIFs. An examination of the productivity changes across the different organizational forms reveals deteriorating efficiency for all three types of firms throughout the 1985-1994 sample period. Finally, the evidence also suggests that the value-added approach and the financial intermediary approach provide different but complementary results. Copyright The Journal of Risk and Insurance.

The causes of insurance cycles and liability crises have been vigorously sought, claimed, and debated by academic investigators for years. The model provided here partially synthesizes several stands of this literature and provides an additional cause. In addition to causes such as the loss-shocks and interest-rate changes included as explanations in the literature, this model posits changing expectations about the parameters of corporate net income as causes of cycles and crises. Since both sides of the market form expectations about losses and interest rates, changes in both demand and supply in the market are incorporated in the explanation. Changing expectations during the crisis reduced supply and made it more inelastic. The same changing expectations increased demand and made it more inelastic and so amplified the effect due to a change in supply. The model predicts an increase in the equilibrium premium, when the mean and variance of losses increase. The model also predicts an increase in the equilibrium premium when the mean interest rate decreases and variance increases. The empirical results of cross-sectional regression and time-series analyses are consistent with

This article examines the impact of board and finance committee characteristics on insurers' cash holdings using a sample of 1,454 U.S. stock property–liability insurer‐year observations. We focus on the roles of independent board members and independent finance committee members. Our results suggest that independent board members allow managers to hold excess cash holdings to avoid underinvestment and play a monitoring role in managers' cash spending behavior in a regulated industry. The overall findings are consistent with the independent director responsibility hypothesis, which suggests that independent directors play a monitoring role in managers' cash spending behavior and avoiding underinvestment problems.

Due to the highly skewed and heavy-tailed distributions associated with the insurance claims process, we evaluate the Rubinstein-Leland (RL) model for its ability to improve the cost of equity estimates of insurance companies because of its distribution-free feature. Our analyses show that there is as large as a 94-basis-point difference in the estimated cost of insurance equity between the RL model and the capital asset pricing model (CAPM) for the sample of property-liability insurers with more severe departures from normality. In addition, consistent with our hypotheses, significant differences in the market risk estimates are found for insurers with return distributions that are asymmetrically distributed, and for small insurers. Third, we find significant performance improvements from using the RL model by showing smaller values of excess return of the expected return of the portfolio to the model return for a portfolio of insurers with returns that are more skewed and for a portfolio of small insurers. Finally, our panel data analysis shows the differences in the market risk estimates are significantly influenced by firm size, degree of leverage, and degree of asymmetry. The implication is that insurers should use the RL model rather than the CAPM to estimate its cost of capital if the insurer is small (assets size is less than $2,291 million), and/or its returns are not symmetrical (the value of skewness is greater than 0.509 or less than - 0.509). Copyright The Journal of Risk and Insurance, 2008.