The Risk-Taking Behavior
of Life Insurers
National Cheng Kung University, Taiwan Hui Hsuan Liu
Yung Ming Shiu
National Cheng Kung
University
Results
Hypothesis
Literature
Conclusions
Methodology
Introduction
Outline
Financial tsunami
√ Not only the banking industry
√ Insurance industry also got involved
AIG firms are suffered from a liquidity crisis when its credit ratings were downgraded to "A-" levels
Insurance industry undertakes the public interest and loss
√ Once the financial difficulty bursts out, the effect is more severe
than non-insurers firms
Past researches mostly discuss the topic for bank industry
Research Motivation
Introduction
The financial tsunami evokes us to review the risk-taking behavior of life insurers
Literatures have documented that risk-taking behavior is a determinant of firm-level corporate governance, include:
√Shareholder independence degree (Attig, Guedhami, and Mishra, 2008; Staking and Babbel,
1995; Cummins and Sommers, 1996 and Chen, Steiner and White, 2001)
√CEO negation power(Hermalin and weisbach, 1998 and Adams, Almeida and Ferreira, 2005) √Board composition (Mayers et al., 1997; Fama, 1980; Fama and Jensen, 1983; He, 2007)
Regulation can be a protection mechanism to guarantee insurers commit to their contracts
√Booth (2007) argues that insurance industry have bilateral informational asymmetries
characteristic, the regulation can prevent the adverse affects of information asymmetries for illiquid contracts.
√ Doidge, Karolyi and Stulz (2007) find that country characteristics explain much more of the variance in governance rating than observable firm characteristics.
So, the country-level corporate governance to risk-taking behavior has
not been well examined and empirical evidence varies.
This study intends to examine firm-level and country level to risk-taking behavior in the life insurance industry.
Research Motivation
Research Purpose
Introduction
Firm-level Corporate GovernanceRisk-taking
Behavior
Country-level
Corporate
Governance
Lai and Lin (2008)
Board structure Property-liability insurersResearch Contribution
Introduction
Country characteristics of governance
I focus on the life insurers in European Union countries. EU countries have owned legislations eachother. The regulation is limited to EU’s policy
Managerial ownership
Chen, Steiner &White (2001)
Life-insurers
Country characteristics of governance
Interaction between country-level and
firm-level corporate governance within cross
country data
to gauge the relationship
Country characteristics of governance
Staking and Babbel (1995), Cummins and Sommers (1996) and Chen, Steiner and White (2001) advanced by the wealth transfer hypothesis versus risk aversion hypothesis, they argue that if managers enlarge the proportion of ownership, theirs’ behavior and interest will align with shareholders’ interests and have strong motivation to maximize theirs’ value by increase the level of risk.
Attig, Guedhami, and Mishra (2008) find that mainly in East Asian firms, multiple shareholders structures exert an internal governance role to control private benefits and to reduce information asymmetry, they actively take risks in investments.
Literature
Firm level:Shareholder
The twofold arguments of CEO negation power:
√ Pathan (2009) follows the concept of Fama and Jensen (1983), Weisbach (1998) and Hermalin and Weibach (2003),
documenting bank risk-taking is negatively related to CEOs power. √ In the life insurance industries, CEOs is likely to be the person
with the most power and influence within the company. Wen and Chen (2008) show that an executive with the dual role as a
chairman of the board has a negatively impact on the firm’s risk strategy.
√ CEOs are part of the board, they often exploit theirs’ power and negotiate with their board of directors to seize some private
benefit, further have more power and prefer to make risk-taking behavior decision (Adams, Almeida, and Ferreira, 2005).
Overall, we prefer the positive relationship within the relationship
Literature
Firm level:Hermalin and Weisbach (2003) suggest that a small
level of board size allows for more effective monitoring and improves firm performance.
Jensen (1993) also indicates that larger boards could be
less effective than smaller boards because of
coordination problems and director free-riding. Pathan (2009) concluded that a smaller board size
should relate positively to risk-taking behavior.
Literature
Firm level:Firm level :
Corporate Governance and Risk-taking Behavior
Hypothesis
Hypothesis 1
CEO Negation Power Shareholders Independence Degree Board Size H1:Other things equal, stronger firm-level corporate
governance (Shareholders Independence Degree and
CEO Negation Power / Board Size )leads life insurers to engage in (higher/lower) level of risk taking behavior.
+
+
Economic freedom is a part of country regulation of governance. The index is published by the Heritage Foundation and available for each country since 1995. We refer the website (http:// www.heritage.org/index) to appear the rank of countries of my data.
In generally, more high index of economic freedom, the country’s regulation is more free than others.
Insurance industry is a highly regulated industry. The legislation limits the firms’ operation and influence the risk-taking behavior.
The differences in economic freedom may help to understand why firms are financed and owned so differently in different countries.
Literature
Country level:FIGURE1 : The Average of Worldwide Economic Freedom Index
After year 2001, the index of Europe started to exceed the index of Americas.
The EU countries all restricted by the same rules
Economic Freedom, Corporate Governance and Risk-taking Behavior
Hypothesis
Hypothesis 2
McMullen, Bagby, and Palich (2008) argument that firms within high economic freedom countries have more opportunities to get in different businesses, the political and legislative power force firms tend to take more risky behaviors. Berggren (2003) to suggest institutions that guarantee economic freedom plausibly have capacity to provide the growth-enhancing kind of incentives.
H2:
Other things equal, the relation between firm-level corporate governance and risk behavior is stronger in countries that have higher level of economic
freedom than in countries that have lower level of economic freedom.
Hypothesis 1
Methodology
t i t i t i t i t i t i t iCV
SHAC
CEOP
BORS
MANO
Risk
, , 1 , , 1 5 , 4 , 3 , 2 , 1 0 ,1
John, Litov and Yeund (2008)
H1:
Other things equal, stronger firm-level
corporate governance leads life insurers to
engage in higher level of risk taking behavior.
Hypothesis 2
Methodology
t i t i t i low t i t i low t i t i low t i t i low t i t i t i t i t i t iCV
EF
SHAC
EF
CEOP
EF
BORS
EF
MANO
SHAC
CEOP
BORS
MANO
Risk
, , 2 , , 2 5 , , , 4 , , , 3 , , , 2 , , , 1 , 4 , 3 , 2 , 1 0 ,2
H2:Other things equal, the relation between firm-level corporate governance and risk behavior is stronger in countries that have higher level of economic freedom than in countries that have lower level of economic freedom.
