Firm's demand for insurance: An explorative approach

Abstract

This paper addresses the question, what influences the insurance demand of companies and examines the influence of managerial risk aversion in this decision process. An explorative research approach based on qualitative data analysis is applied to explore the factors influencing the insurance related decision behavior in organizations. Using interviews and observations of firm's insurance managers, the results identify interdependencies between factors of insurance demand, such as ownership structure, managerial discretion, volatility of earning, size, services of the insurer, and business diversification which allows to propose a framework of contextual factors affecting company's insurance demand. Within this framework, the data imply managerial risk attitudes as decisive factor in the decision process about insurance demand in companies. This explorative study enriches the existing theories of firms’ insurance demand and addresses feedback from practice into theory.

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“…Finally, the current study includes a set of control variables characterizing a company profile, in order to investigate how specific features of a company are associated with its decision to purchase cyber insurance. Prior literature suggests that the following features of an enterprise are related to the demand for corporate insurance (Main, 1982;Mayers, Smith, 1990;Hoyt, Khang, 2000;Krummaker, 2019): firm size measured by employment and annual turnover as a proxy; firm age; type of business; the firm's legal form; origin of equity; share of intangibles in total assets; and the firm's share of equity in total liabilities (leverage). Therefore, we hypothesize that: H3.…”

“…Thus, other motives are being investigated, such as preserving a company's liquidity in case unfortunate events occur (Main, 1983); reduction of bankruptcy costs and financial distress (Main, 1982;MacMinn, 1987); tax optimization (Main, 1982); compliance with regulations, in some industries (Mayers, Smith, 1990); and demonstration of good corporate risk management practices (Main, 1982;Grace, Rebello, 1993). These motives can be represented by various characteristics of a given company, including size of employment, annual turnover, industry type, and legal status of a company; taken together, these characteristics can be considered to comprise a 'company profile' (Krummaker, 2019). Ultimately, two predominant factors may influence a company's decision to purchase insurance: risk aversion of its owners or managers (which is the result of risk perception) and the company profile.…”