Kathleen A. McCullough

The Effect of Data Breaches on Shareholder Wealth

Many companies face the risk of a data breach exposing stored personal information of customers and employees. The frequency of such incidents has been increasing over time and can result in significant costs for the affected firm. This article examines the stock markets assessment of the cost of data breaches at publicly traded companies in which personal information such as customer and/or employee data are exposed. Using event study methodology on a sample of 77 events between the beginning of 2004 and the end of 2006, we find that the overall effect of a data breach on shareholder wealth is negative and statistically significant. Based on a cross‐sectional analysis of the cumulative abnormal returns, we find a negative association between market reaction and firms that are less forthcoming about the details of the breach. We also find that firms with higher market‐to‐book ratios experience greater negative abnormal returns associated with a data breach. Further, we find that firm size and subsidiary status mitigate the negative effect of a data breach on the firms stock price and that the negative market reaction to a data breach is more significant in the most recent time periods of the sample.

Internal Capital Markets and the Partial Adjustment of Leverage

Prior literature provides support both for the existence of target capital structures and internal capital markets (ICM). The issue of whether firms use internal capital markets to reduce deviations from target capital structures, however, has yet to be examined. We provide the first empirical evidence of a link between deviations from target leverage and ICM activity. Based on data that allow us to trace intra-group capital market transactions for property–casualty insurers, our findings provide the first joint evidence that affiliated insurance companies have target leverage ratios and that ICM activity is used to manage deviations from target leverage.

Deciding Whether to Invest in Mitigation Measures: Evidence from Florida

Prior research provides theoretical insight on factors likely to impact the decision to mitigate such as the degree of risk aversion, the cost of market insurance, and the cost of self insurance. We provide empirical evidence related to several hypotheses from the self insurance literature on the decision to mitigate.

Separation of Ownership and Management: Implications for Risk‐Taking Behavior

Issues associated with the relation between the separation of ownership and management and risk‐taking behavior have been considered in an array of studies, with varying results. Due to the wide variety of ownership structures present, the property–casualty insurance industry provides an excellent setting to test the conflicting hypotheses related to separation of ownership from management and risk taking behavior. Employing a large sample of property–liability insurance companies over the period of 1996–2004, we empirically test the alternative hypotheses regarding the implications of separation of ownership from management for firms’ risk taking behavior. The empirical tests include the ownership structures specified in prior research as well as a more detailed classification scheme. We find that each ownership structure is significantly different from every other ownership structure in terms of risk.

An Empirical Examination of Stakeholder Groups as Monitoring Sources in Corporate Governance

Insurers are formally and informally monitored by a variety of stakeholders, including reinsurers, agents, outside board members, and regulators. While other studies have generally examined these stakeholders separately, they have not accounted for the fact that there is some relation among the stakeholder groups, and the presence of these groups is likely to be jointly determined. By empirically controlling for these potential interrelations, we create a more complete assessment of the impact of these stakeholders/monitors on insurers’ risk taking. Specifically, we find that the presence of some stakeholders offsets the degree or presence of others, and that most stakeholders/monitors are associated with a reduction of overall firm risk.

The Insurance Industry's Talent Gap and Where We Go From Here

There is concern among insurers and related firms in the United States and abroad that there will be a shortage of skilled insurance professionals in the next few years as current workers retire. Though there have been discussions among insurers, organizations, and academics as to how to address this issue, until recently, each group has been primarily working in isolation. The Insurance Education & Career Summit, which took place in September 2011, brought together 110 individuals across these groups for the purpose of creating a unified strategy to both attract and retain skilled workers to the insurance industry and work to create the next generation of insurance executives. This article provides a brief background on the talent gap issue. We also discuss its potential impact on the insurance industry. Finally, we summarize the main obstacles identified by Summit participants to both attracting and retaining skilled workers as well as the strategies developed to overcome these obstacles.

An Analysis of Contingent Commission Use by Property–Liability Insurers

The payment of contingent commissions in the property–liability insurance industry has long been commonplace, but recent events have made the practice highly controversial. Even prior to these events, wide variation existed among insurers in their use of contingent commissions. In this article, we examine the determinants of whether or not an insurer chooses to pay contingent commissions at all, as well as the determinants of the extent of their use for those insurers that pay them. We find a number of variables that have a significant relation to the use and extent of use of contingent commissions.

The Impact of Asbestos and Environmental Reserves Increases on Shareholder Wealth

Abstract Between 1992 and 2001 significant reserves increase announcements were made by several major property/liability insurers. These reserves increases were for the purpose of recognizing expected asbestos and environmental (A&E) liability. Although most analysts agree that U.S. insurers are underreserved for asbestos and environmental liability, how the market reacts to an insurer’s announcement of an increase in these reserves has not been analyzed. An insurer that is significantly underreserved is likely to be viewed by the market as lacking financial stability for the long term. However, when a company increases its reserves, there is a charge to income and a reduction in capital. If surplus is diminished sufficiently as a result of the increased reserving, regulatory attention and eroding shareholder and market confidence could result as well. By calculating the sample insurers’ cumulative abnormal returns surrounding the largest asbestos and environmental reserves increase announcements made between 1992 and 2001, the study estimates and documents the market’s reaction to these reserves increase announcements. We further explore the potential impact of additional asbestos and environmental liability exposure reporting requirements. Starting with 1995 statutory annual accounting statements, Footnote 24 required additional reporting by insurers of their asbestos and environmental liability exposure (1995 statements were publicly available by the end of the first quarter of 1996). When looking at reserves increase announcements prior to this additional reporting requirement, we find that most insurers announcing large increases in asbestos and environmental reserves prior to 1996 experience a significant reduction in stock price in the days surrounding their announcement. However, consistent with the notion that the additional accounting disclosure requirements after 1995 (Footnote 24) provide valuable information on insurers’ exposure, we find that the announcement of A&E reserves increases after 1995 had no statistically significant effect on the market value of announcing insurers.

The Impact of No-Fault Legislation on Automobile Insurance

Abstract Since its inception, the effectiveness of no-fault legislation has been highly debated. Although some research suggests that no-fault laws are effective in reducing costs, other evidence suggests that the current no-fault systems may not meet the original objectives. This study provides a detailed assessment of the relation of no-fault laws and automobile insurance losses for the period 1994 to 2007. By examining total automobile insurance losses along with liability and personal injury protection losses, we are able to determine if and how specific provisions of the laws are related to claims costs. We find a negative relation between the presence of a no-fault law and total losses, which suggests that no-fault systems are associated with lower losses than the traditional tort system. In addition, an examination of no-fault-only states suggests that specific provisions of no-fault laws, such as thresholds and limitations on benefits, have some effect on losses. With the sunset of Colorado’s no-fault legislation in 2003, the recent passage of Personal Injury Protection Reform in Florida, and proposed federal choice legislation, the overall impact of no-fault as well as the specific components of the laws are of heightened importance to consumers, insurers, and lawmakers.

The Impact of Hurricane Mitigation Features and Inspection Information on House Prices

This paper examines the effect of hurricane mitigation features and their verification on the transaction prices of single-family homes. Some of these features are obvious to buyers and sellers (visible) and others are not easily observed (hidden). Prior research on the relationship between these features and house prices has implicitly assumed that the features are known and that buyers and sellers are equally informed. This paper contributes to the literature by examining the potentially different effects of the visible and hidden features, and the verification of each, on prices in an environment of incomplete and asymmetric buyer-seller information. We assemble a dataset that includes sale information on all detached single-family residential properties in Miami-Dade County merged with a dataset of insured properties from Citizens Property Insurance Corporation. Using a treatment effects model, we find that properties with both visible and hidden mitigation features that have been verified by inspection sell, on average, at prices approximately 10% higher than properties where the features have not been verified, ceteris paribus. The results also indicate that although visible and hidden features differ significantly in their effects on price, the magnitude of the effect of the inspection on price is surprisingly similar whether features are visible or hidden. Our findings indicate that the price effect of the inspection is due to a combination of the risk mitigating benefits of the features and the insurance premium credits they represent.