Mark L. Cross

Corporate demand for insurance: Some empirical and theoretical results

While risk aversion explains individual consumer demand for insurance, it does not explain the corporate demand for insurance. Studies have suggested a variety of incentives that motivate corporations to purchase insurance. We find that the primary motivation for corporate insurance purchases can be explained by the bondholders me-first rule. In return for insurance, bondholders will charge stockholders a lower cost of debt, thereby increasing firm value.

The Underwriting Cycle and the Risk Manager

This paper examined the property and liability insurance industrys underwriting cycle and proposes a methodology for determining if a cycle exists. The methodology uses an innovative cycle regression algorithm to capture the behavior of the stochastic processes which generate combined loss and expense ratios. The conclusions indicate that a six year underwriting cycle does exist for the property and liability insurance industry.

Bank shareholder wealth effects of California's proposition 103

Proposition 103, approved by California voters on November 8, 1988, allows California state-chartered banks to become vendors of life, health, and property-liability insurance products. It is hypothesized that such a regulatory realignment should have resulted in a wealth increase for California state-chartered banks. An examination of the market response among these banks indicates a statistically significant positive stock price response on the dates of passage of Proposition 103 and a subsequent Supreme Court ruling upholding its constitutionality.

The impact of a captive insurance company's formation on a firm's value after the carnation case

Abstract One of the primary reasons previously cited for forming a captive insurance company is tax advantages based on premium deductibility. The IRS ruling in the Carnation Company case was the first time that investors experienced a decisive legal action signaling the possibility that premiums paid to captives might not be tax deductible to the parent company. The purpose of this paper is to determine if the investors perceived lack of tax deductibility of premiums, based upon the Carnation case, has an impact upon the parent firms value at time of captive formation. The results indicate that the market placed a high value on the ability of the parent company to deduct for tax purposes the insurance premium paid to its captive. Before the Carnation case there was a positive reaction by the market to captive formation whereas after the Carnation case, there was a negative reaction.