Martin Halek

Earnings Smoothing, Executive Compensation, and Corporate Governance: Evidence from the Property-Liability Insurance Industry

Unlike studies that estimate managerial bias, we utilize a direct measure of managerial bias in the U.S. insurance industry to investigate the effects of executive compensation and corporate governance on firms’ earnings management behaviors. We find managers receiving larger bonuses and stock awards tend to make reserving decisions that serve to decrease firm earnings. Moreover, we examine the monitoring effect of corporate board structures in mitigating managers’ reserve manipulation practices. We find managers are more likely to manipulate reserves in the presence of particular board structures. Similar results are not found when we employ traditional estimated measures of managerial bias.

Insurer Reserve Error and Executive Compensation: Insurer Reserve Error and Executive Compensation

This article investigates incentives of insurance firm managers to manipulate loss reserves in order to maximize their compensation. We find that managers who receive bonuses that are likely capped or no bonuses tend to over-reserve for current-year incurred losses. However, managers who receive bonuses that are likely not capped tend to under-reserve for current-year incurred losses. We also find that managers who exercise stock options tend to under-reserve in the current period.

Coastal Building Codes and Hurricane Damage

We explore whether federal- and state-level changes to coastal building standards were effective in mitigating losses to coastal property following Hurricane Charley. We find properties built seaward of and after the reestablishment of the Coastal Construction Control Line, and those built under the National Flood Insurance Program and located in an A-Zone, had more damage relative to similarly located structures built before these regulatory changes. We show the NFIP regulations allowed for weaker foundation requirements and lower elevations relative to the earlier county code. This likely led to greater flood damage, as supported by analysis of individual structural components. (JEL Q54, Q58)

Information Risk and the Cost of Capital

This article applies a unique accruals measure to empirically test whether accruals quality affects the cost of capital for property–liability insurers. We utilize insurer loss reserve errors to accurately measure the quality of accruals. This measure, as well as conventional accruals measures, is used to investigate the extent to which accruals quality is priced into both debt and equity capital. We find that accruals quality is priced into debt capital; however, we find virtually no evidence that accruals quality is priced into equity capital. Our results should be of particular interest to insurers as it affects pricing ability. Specifically, insurers who provide primary debtholders (i.e., policyholders) less information risk are able to command higher prices. Furthermore, our results suggest that insurance is not a diversifiable asset.

The Problem of Asymmetric Information: A Simulation of How Insurance Markets Can Be Inefficient

The concept of adverse selection is discussed in virtually all academic insurance textbooks. However, undergraduate students have rarely had the experience of purchasing insurance which may limit their ability to fully comprehend the market inefficiencies created by asymmetric information. We provide a classroom simulation of an insurance market that highlights the concept of adverse selection and its impact on the insurance industry. Participants are asked to make insurance decisions in pursuit of their own interests under different market conditions. In the absence of perfect information, participants actively observe that a socially optimal outcome does not occur.

Do Coastal Building Codes Mitigate Hurricane Damage to Residential Property

In this paper we explore whether increased coastal building standards imposed by federal and state level initiatives are effective in mitigating losses to coastal property. We first examine if the coastal building code regime under which a property is constructed affects the likelihood of hurricane induced residential property damage. Then, for those properties which incur hurricane damage, we examine whether the extent of damage is explained by the relevant coastal building code regime. Our analysis shows that those properties built following coastal building code changes associated with the National Flood Insurance Program were more likely to sustain damage relative to similarly located pre-National Flood Insurance Program construction. For those damaged properties, we find the extent of damage is greater for post-National Flood Insurance Program construction, where damage is increasing in the required base flood elevation. Further investigation suggests wind, flood or a combination of both perils as the likely causes of damage for post-National Flood Insurance Program construction. Our findings raise concern regarding the effectiveness of federal and state mandated coastal building codes as ex-ante mitigation of property losses from hurricanes.

The Hungarian Insurance Market: Economic Transition in the Insurance Sector

This article analyzes Hungarys insurance sector as an important part of the countrys economic transition from a centrally planned economy to a market economy. It details the historic economic development of the Hungarian insurance market from a state monopoly to a competitive insurance market where foreign-owned insurance companies have a dominant market share.