Wen-Chang Lin is an associate professor in the Department of Finance, National Chung Cheng University, Taiwan. Yi-Hsun Lai is an assistant professor in the Department of Finance, National Yunlin University of Science and Technology, Taiwan. Michael R. Powers is a professor in the Department of Finance, Tsinghua University, and on leave from the Department of Risk Management and Insurance, Temple University. Wen-Chang Lin can be contacted via e-mail: email@example.com.
The Relationship Between Regulatory Pressure and Insurer Risk Taking
Article first published online: 14 MAR 2013
© The Journal of Risk and Insurance, 2013
Journal of Risk and Insurance
Volume 81, Issue 2, pages 271–301, June 2014
How to Cite
Lin, W.-C., Lai, Y.-H. and Powers, M. R. (2014), The Relationship Between Regulatory Pressure and Insurer Risk Taking. Journal of Risk and Insurance, 81: 271–301. doi: 10.1111/j.1539-6975.2012.01505.x
- Issue published online: 16 MAY 2014
- Article first published online: 14 MAR 2013
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.