Stephen G. Fier

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.

Life Insurance Lapse Behavior

Life insurance policy lapses are detrimental to issuing insurers when lapses substantially deviate from insurer expectations. The extant literature has proposed and tested, using macroeconomic data, several hypotheses regarding lapse determinants. While macroeconomic data are useful in providing a general test of lapse determinants, the use of aggregate data precludes an analysis of microeconomic factors that may drive the lapse decision. We develop and test a microeconomic model of voluntary life insurance lapse behavior and provide some of the first evidence regarding household factors related to life insurance lapses. Our findings support and extend the prior evidence regarding lapse determinants. Consistent with the emergency fund hypothesis we find that voluntary lapses are related to large income shocks, and consistent with the policy replacement hypothesis we find that the decision to lapse a life insurance policy is directly related to the purchase of a different life insurance policy. We also find that age is an important moderating factor in the lapse decision. Changes in income appear to more directly affect the decision to lapse for younger households, while they are generally unrelated to the lapse decision for older households.

Catastrophes and the Demand for Life Insurance

Prior research suggests that catastrophes may lead to increases in risk mitigation, risk perception, and the demand for insurance. Given the extensive damage inflicted by major natural disasters, such a phenomenon is intuitive for property risk. However, theory and prior empirical evidence also suggest a broader behavioral perspective and we therefore examine the possible link between catastrophes and subsequent demand for insurance against mortality risk. Based on U.S. state-level data, we provide evidence of a significant positive relation between catastrophes and several measures of life insurance demand.

The Impact of Insurer Name Changes on The Demand for Insurance

Corporate name changes are relatively common events, with some evidence suggesting that name changes are strategic in nature. Although prior research has examined the effect of name changes on the firm, these studies have focused primarily on the stock price reaction to name changes. Such a focus has a number of limitations, including a reliance on samples that consist solely of publicly traded firms and an inability to determine whether the source of the impact is driven by increases in revenue, increases in efficiency, and/or reductions in costs. We overcome these limitations by testing the impact of corporate name changes on U.S. property–casualty insurers using detailed statutory data. We find a significant and positive relation between name changes and subsequent growth in premiums. The results are robust across various model specifications and suggest that name changes contain information that consumers interpret as meaningfully positive.

Adverse Selection in the Credit Life Insurance Market

Adverse selection plays a prominent role in the insurance literature due to its negative implications for insurer financial performance and stability. However, there is a paucity of empirical evidence consistent with the existence of adverse selection in the U.S. insurance market. Potential reasons for the lack of evidence include: (1) that insurers effectively use underwriting and pricing to counteract adverse selection; or (2) that consumers either do not have, or fail to take advantage of, private information. We test for the existence of adverse selection in the credit life insurance market where opportunities to exploit asymmetric information are pronounced due to the lack of underwriting and highly regulated prices. Our analysis provides evidence consistent with adverse selection in the credit life market and suggests that the lack of empirical evidence regarding adverse selection may be due to effective underwriting rather than consumers failing to use informational advantages to their benefit.

Insurer Growth Strategies: Insurer Growth Strategies

We study corporate growth strategy within the U.S. property–casualty insurance industry—where firms are required to report uniquely detailed operating information. We present and test two hypotheses related to the manner in which firms choose to grow: the pecking order hypothesis and the managerial discretion hypothesis. Our results imply that insurers follow a general pecking order of growth strategies, where they tend to grow first by entering new states, then by adding new lines of business, and finally through acquisitions. This order is consistent with firms initially choosing to grow in the least costly and complex manner and subsequently choosing more costly and complex methods. We also find evidence in support of the managerial discretion hypothesis as mutual insurers are less likely to choose to grow and, when they do, they tend to select less complex growth methods.

Probability Updating and the Market for Directors’ and Officers’ Insurance: Probability Updating and D&O Insurance

Over the past decade, much attention has been given to the topics of corporate governance and corporate risk management. One increasingly important insurance product associated with each of these issues is directors’ and officers’ (D&O) liability insurance. Given the interconnectedness that exists between D&O insurance, corporate risk management, and corporate governance, we exploit industry�?specific D&O data to explain how industries most associated with the corporate scandals of the early 2000s adjusted demand patterns during periods of certainty and uncertainty. The rich data set coupled with dramatic changes in the marketplace allows for the testing of insurance demand patterns and enables us to offer insight into the markets response to a unique type of loss shock. The results of this study suggest evidence in favor of demand�?side probability updating, whereby those industries most associated with the corporate scandals of the early 2000s adjusted the demand for D&O insurance during periods of greater uncertainty.

The Market for Directors’ and Officers’ Insurance

Directors’ and officers’ (D&O) liability insurance is a commonly used risk management tool for corporations both in the United States and abroad. While prior research has focused on the demand for D&O insurance and its role in corporate governance, there is an absence of literature on the supply side of the D&O market. Using the newly available D&O Insurance Coverage Supplement to insurers’ statutory filings, we develop a more comprehensive understanding of the D&O insurance market and of those firms that write D&O coverage. We develop and estimate a model of the decision to write D&O insurance and the extent of market participation. Our results suggest that there are significant operational and financial differences between firms that supply D&O insurance and those that do not. Several of these differences (specifically, size, diversification, and organizational form) are consistent with the predictions of the managerial discretion hypothesis.