This article uses life insurance data to estimate the Pratt-Arrow coefficient of relative risk aversion for each of nearly 2,400 households. Attitudinal differences toward pure risk are then examined across demographic subgroups. Additionally, differences in speculative risk-taking are examined across demographic groups based on survey responses and compared with the results on pure risk aversion.

We examine the information value contained in insurer rating changes. Using a contemporary event study approach, we document an asymmetric reaction of stock prices to rating changes: downgrades cut share prices by approximately 7 percent but upgrades have little significant effect. This result varies across agencies as share prices react more strongly to A.M. Best and Standard & Poor's downgrades than to Moody's. We observe a similar asymmetric reaction to rating changes subject to a common rating benchmark. Finally, we find that prices fall most dramatically when a rating downgrade from one rating agency follows a downgrade from another agency.

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Unlike studies that estímate managerial bias, we utilize a direct measure of managerial bias in the U.S. insurance industry to investigate the effects of executive compensation and corporate governance on firms' eamings management behaviors. We find managers receiving larger bonuses and stock awards tend to make reserving decisions that serve to decrease firm earnings. Moreover, we examine the monitoring effect of corporate board structures in mitigating managers' reserve manipulation practices. We find managers are more likely to manipula te reserves in the presence of particular board structures. Similar results are not found when we employ traditional estimated measures of managerial bias.

We estimate the effect of household wealth on the demand for life insurance using survey data from a broad cross-section of the USA. This procedure allows us to test the Pratt-Arrow hypothesis of decreasing absolute risk aversion (DARA). Additionally, we estimate the relative magnitude of prudence, the propensity to take precautions when faced with risk. We find that life insurance purchases increase with wealth, and that on average American households exhibit about 94 per cent as much prudence as risk aversion. On the basis of this evidence, we reject the DARA hypothesis.

This article applies a unique accruals measure to empirically test whether accruals quality affects the cost of capital for property–liability insurers. We utilize insurer loss reserve errors to accurately measure the quality of accruals. This measure, as well as conventional accruals measures, is used to investigate the extent to which accruals quality is priced into both debt and equity capital. We find that accruals quality is priced into debt capital; however, we find virtually no evidence that accruals quality is priced into equity capital. Our results should be of particular interest to insurers as it affects pricing ability. Specifically, insurers who provide primary debtholders (i.e., policyholders) less information risk are able to command higher prices. Furthermore, our results suggest that insurance is not a diversifiable asset.

This paper investigates incentives that managers of insurance firms have to manipulate accounting results in order to maximize their total compensation. Insurance company executives are in a relatively unique position in that they are able to impact their total compensation by exercising discretion in loss reserve practices. We find evidence suggesting that managers whose compensation packages are more incentive-laden are associated with larger loss reserve errors. Specifically, we find managers that receive larger bonuses and stock awards tend to have larger loss reserve errors. We specifically show that managers who hold more stock or exercise more stock options tend to understate loss reserve. In addition, we examine the monitoring effect of the corporate board structure in mitigating managers' reserve manipulation practices. We find that managers are more likely to manipulate reserves in the presence of a weak board.

We investigate the effect major catastrophes are expected to have on equilibrium price and quantity in the insurance market. In particular, we examine whether investors expect total industry revenue to increase following a disaster's shock to insurers' financial capital. Rather than examine insurers directly, we study insurance brokers, who earn commissions on premium revenue but do not pay losses following a disaster. We conduct an event study on insurance broker stock returns surrounding the 43 largest insuredloss catastrophes since 1970. We find that brokers earn positive abnormal returns on the day of the event, and that these returns are sustained following the top 20 largest events. We then investigate factors influencing these returns and find that returns are positively related to the size of the loss and negatively related to existing insurer capital. From this, we conclude that catastrophe shocks are expected to increase net industry revenue, benefiting brokers most immediately. This investor response is consistent with economic theories of a negative relationship between capital and insurance prices and price-inelastic demand for commercial insurance. . We would like to thank the two anonymous referees for their insights and suggestions. Thanks also are due to