Risk-Based Capital and Firm Risk Taking in【推荐论文】 .doc
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1、精品论文Risk-Based Capital and Firm Risk Taking inProperty-Liability InsuranceJIANG CHENG1, Mary A. Weiss25(1. School of Finance, Shanghai University of Finance and Economics, ShangHai 200433;2. Fox School of Business, Temple University, Philadelphia 19025)Abstract: This research investigates the relati
2、onship 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 results10suggest that risk and capital are positively related,
3、 so that capital increases are associated with increases in investment and underwriting risk. This positive relationship was not consistently significant in1993, prior to the implementation of RBC requirements. Both under-capitalized insurers and marginally adequately capitalized insurers adjusted t
4、heir capital and risk towards firm targets at ahigher speed than well-capitalized insurers in the post RBC period. But underwriting and asset risk15also increased for less well-capitalized insurers.Keywords: Insurance Economics; Risk-Based Capital; Regulatory Effect; Capital; Risk0IntroductionMainta
5、ining insurer solvency has always been a focal point of insurance regulation.U.S.20regulators use various methods to promote insurers financial strength and protect policyholders from losses due to insolvency. One important tool is embodied in Risk Based Capital (RBC) requirements which went into ef
6、fect in the U.S. property-liability insurance industry in 1994. An important feature of the RBC system is that it mandates intervention by the regulator when risk-based capital levels are deemed deficient. The degree of intervention varies with the degree of25deficiency, and ranges from regulatory a
7、pproval of an insurer action plan to correct the deficiencyto mandatory take-over of the insurer.Because it contains mandatory requirements, the RBCsystem is at least partly designed to eliminate regulatory forbearance in the industry.Research by Cummins and Nini1 suggests that the imposition of RBC
8、 requirements may have been partly responsible for increased capital levels in the property-liability insurance industry30in the 1990s, enhancing solvency. But considerable research criticizes the RBC system.For example, Cummins, Harrington and Niehus2 hypothesize that imperfections in the existing
9、RBC system will likely distort insurers behavior in undesirable and unintended ways so as to avoid being incorrectly identified as needing regulatory attention. Most studies of RBC have focused onthe effectiveness of RBC requirements in predicting property-liability insurer insolvencies.35Research s
10、uggests that RBC results are not good predictors of insolvency (e.g., Cummins, Grace and Phillips, 19993; Cummins, Harrington and Klein, 19954). Cheng and Weiss (2012) 5 6 find that the accuracy of the RBC ratio in predicting insolvencies is inconsistent over time. They provide summary statistics fo
11、r the RBC ratios historically and the RBC classifications. Another possibility that exists is that insurers (especially weak insurers) will exploit anomalies in the RBC40formula so as to make their financial position appear to be more favorable than it really is.To understand the true effect of RBC
12、requirements on insurers behavior, the relationship between capital and risk in insurers must be determined. For example, capital and insurer risk may be positively related so that increasing capital requirements leads to offsetting increases in risk.In this case, increases in risk corresponding to
13、the increased capital requirements associated withFoundations: Specialized Research Fund for the Doctoral Program of Higher Education (New Teachers Grant#Z1025420); Scientific Research Foundation for the Returned Overseas Chinese Scholars (Grant #2012940) Brief author introduction: JIANG CHENG, (197
14、1-), Male, Assistant Professor,Main research areas include Corporate governance and Insurance. E-mail: - 14 -45RBC may have offset RBCs intended effect of improving solvency.On the other hand, capital and risk may be unrelated or negatively related so that increases in capital requirements are accom
15、panied by no change in insurer risk or decreases in insurer risk.Then, RBC requirements may have led to a net improvement in capital levels and enhanced solvency in the industry.In spite of these possibilities associated with the use of RBC in practice, little research is50aimed at addressing how in
16、surers may have changed their capital decisions and risk taking behavior before and after adoption of RBC. Cummins and Sommer7 determine the empirical relationship between capital and risk in property-liability insurers using a sample period of 1979 to1990. They find the relationship between capital
17、 and risk to be positive in property-liability insurers.This result suggests that any increases in capital that may be attributable to RBC55requirements would be offset by increases in risk. However the period preceded implementation ofRBC, and insurer behavior might be different as a result.The pur
18、pose of this study is to determine the relation between insurers capital positions and risk-taking behavior in 1993 (prior to the implementation of RBC) and from 1994 to 2007 (after RBC was adopted). The period 1993 in addition to 1994 to 2007 is examined because insurers60may have been readjusting
19、their capital and risk portfolio in anticipation of RBC.Further, this research estimates the impact of RBC requirements on marginally adequately capitalized insurers and under-capitalized insurers in particular.The sample of insurers studied consists of pooled, cross-sectional U.S. property-liabilit
20、y insurers included in the NAICs data base for the period 1992 to 2007. Thus this research also65updates the analysis of Cummins and Sommer7. Following a long line of literature, the modelused allows for capital and risk positions to be determined simultaneously, so that three-stage least squares (3
21、SLS) estimation is used to estimate the capital and risk equations. The 3SLS model incorporates the possibility that insurers may be unable to adjust to their target risk or capital levels over the course of a year.That is, the capital and risk equations estimated allow for partial70adjustment of ca
22、pital and risk. The capital measures rely on surplus, while measures of insurer risk are based on asset and underwriting risk.To measure the effect of RBC implementation on under- and marginally adequately capitalized insurers, indicator variables that reflect relative capitalization of insurers (us
23、ing the RBC system) are included in the models.And the inclusion of these variables represents an75innovation from Cummins and Sommer7. The results with respect to these variables can beinterpreted as the impact of regulatory pressure on these insurers from RBC implementation. Ceteris paribus, we po
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