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The Relationship Between Regulatory Pressure and Insurer Risk Taking
Author(s) -
Lin WenChang,
Lai YiHsun,
Powers Michael R.
Publication year - 2014
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2012.01505.x
Subject(s) - actuarial science , liability , capital requirement , business , psychological intervention , economics , market risk , econometrics , microeconomics , incentive , finance , medicine , psychiatry
The article examines the risk‐taking behavior of property–liability insurers in the presence of risk‐based capital regulation. An option pricing model is developed to evaluate the expected regulatory cost and predict a nonlinear relationship between regulatory pressure and insurers’ risk taking. We then conduct an empirical test using the simultaneous threshold regression. The result shows that there is a threshold effect of regulatory pressure on insurer risk taking. Poorly capitalized insurers seem to be aware of their proximity to regulatory interventions but do not fully respond to the impending regulatory pressure. This implies either regulatory interventions are not costly enough or they are too late, or both.