1
Organizational structure, performance and economic crises:
The case of the Dutch property-liability insurance industry in the start of the
21
stcentury
Erik van der Pol
Master Thesis University of Groningen Faculty of Economics and Business MSc Business Administration, Finance
Student number: 1508644
Organizational structure, performance and economic crises:
The
case of the Dutch property-liability insurance industry in the start of the 21
stcentury
Abstract
This study investigates the performance of the Dutch property-liability insurance (PLI) companies in the beginning of the 21st century. In particular we study the performance of two types of PLI companies, namely stock insurance companies and mutual insurance companies.
Because the beginning of the 21st century showed two economic crises periods, we will then also
be able to study which organizational form is hit less by which crisis. We use eight performance indicators from the DuPont model to come to the following question: which organizational structure, mutual or stock insurance companies, have performed better. We do not find any relation between organizational form and performance. However, the results show that listed insurers have a lower loss ratio, indicating that in general, listed insurers have more risky insurance activities, an uncertain cash flow and higher risk policyholders than unlisted insurers. The results also show that the Internet crisis is different from the credit crisis. A remarkable outcome is the lower loss ratio in the Internet crisis, which is contrary to our expectations that because premiums decreases and fraud increases, the loss ratio is likely to rise. Furthermore, the organizational form in relation to the crises periods are found to vary significantly across the different performance indicators. However, we do not find any significant differences between the organizational forms in the Internet and credit crisis.
JEL classification: G01, G22, G30, G32
Table of contents
1. Introduction ... 4
2. Literature review ... 6
3. The performance of insurance companies... 11
3.1 The expense ratio ... 13
3.2 The loss ratio... 15
3.3 Premiums to assets ratio ... 16
3.4 Financial Leverage ... 16
3.5 investment return to asset ratio ... 17
4. The impact of economic crises on the performance of insurance companies ... 18
4.1 The expense ratio ... 20
4.2 The loss ratio... 20
4.3 Investment return to asset ratio ... 21
5. Data... 22 5.1 Data collection ... 22 5.2 Data variables ... 23 5.3 Descriptive statistics ... 27 5.4 Correlation ... 29 6. Methodology... 30 7. Results ... 32
7.1 Overall sample period ... 32
7.2 Economic crisis periods ... 35
7.3 Underwriting performance featured ... 37
8. Conclusion... 38
9. References ... 41
1. Introduction
The impact of corporate governance on economic performance is studied in many ways since Berle and Means (1932) emphasized the disadvantages of the separation of ownership and control in public corporations. Agency problems are the results of such a separation and agency theory has since then became one of the mayor insures in the corporate finance literature (Berly and Means 1932; Jensen and Meckling 1976; Fama and Jensen 1983). The insurance industry provides an interesting environment for studying the agency theory because different organizational forms with different agency costs coexist in the industry. Namely stock insurance companies that employ the standard corporate form and mutual insurers companies that are like cooperatives where customer and ownership functions are merged (Mayers & Smith, 1988).
The insurance industry in the Netherlands has a long and rich history. Several Dutch insurance groups are today among the top global players in the worldwide insurance market. On a ranking
of countries with the highest total insurance premiums in 2009, The Netherlands isranked 10th in
the world (Swiss Re, 2010). Also, the Dutch insurance market is one of the most open markets in the world, mainly due to its liberal regulatory environment and its open distribution structure.
In this research we focus on the property-liability insurance market because it is widely recognized in the financial and insurance economics literature that life insurance business is potentially more predictable than property-liability insurance business (Winton, 1995) and therefore it may also become strongly affected by economic crises. Property-liability insurance is also usually regarded as being more short-term and PLI accounts reflect trading performance over a reasonably short period of time (Diacon and O’Sullivan, 1995). Poor management decisions in property-liability insurance can therefore lead to a relatively fast decline in profits and may have important consequences. Due to the diverse set of existing corporate ownership structures, the insurance industry offers us a unique environment where we can examine the effect of business behavior and the business cycle on specific types of organizations forms. In this research we will focus on the two most used organizational forms in the Dutch insurance industry, namely, the mutual and the stock company1.
1
Within PLI companies, a major conflict arises between owners, who wish to maximize the market value of the firm's equity, and policyholders, who wish to minimize premiums and the risk of unpaid claims. Agency theory arguments have led to the development of several theories about the stock and mutual organizational structures. The two organizational structures have comparative advantages in dealing with different types of agency costs (Fama and Jensen, 1983). On the other hand, stock insurance companies provide more effective mechanisms for controlling owner-manager conflicts than mutual insurance companies. Stock insurance companies have ownership claims that give rise to control mechanisms such as proxy fights, hostile takeovers, and executive stock option plans that can be used to reduce opportunistic behavior of managers. Mutual insurance companies, on the other hand, do not have these ownership claims and the control mechanisms available to mutual owners are much weaker. Stock insures, however, also have disadvantages as the owner-policyholder conflict is likely to be relatively high because stockholders have an incentive to expropriate value from policyholders by taking actions such as delaying claim payments and changing the risk-characteristics of the firm after policies have been issued (Mayers and Smith, 1981). Mutual insurance companies deal in general more effectively with the owner-policyholder conflict because the policyholders are the same time the owners of the mutual firm.
Several empirical studies have examined that the stock insurers outperform the mutual ones. O’Hara (1981) came to the result in the United States: stocks insurers appear more cost efficient and profitable. Genetay (1999) finds that in the U.K. stock insurance companies get on average higher returns than mutual inrsurance companies. In contrast to these studies, Fields (1988) finds in his study that there is no difference in performance between mutual and stock insurance companies in the USA. Jeng and Lai (2005) for the Japanese property causality insurers and Cummings et al. (2004) for the Spanish insurers, do neither find differences in performance of mutual and stock companies. On the other hand, Mayers and Smith (1981) and Fama and Jensen (1983) finds that the mutual form of organizational is potential more efficiency than the stock organizational form. Armitage and Kirk (1994) find better performance for mutual insurance
companies when comparing both organizational forms in the UK. The partially contradictory
results are maybe based on the idea of Mayers and Smith (1988) that the survival of both organizational forms indicates that each form has its own particular advantages.
weaknesses of the two most used organizational structures, mutual and stock insurance companies, will be examined in relation with the changing market conditions in the Dutch property-liability insurance industry in the beginning of the 21st century. Research in this time frame, including two economic crises, has not been done before. We also contribute to existing literature by choosing the Dutch insurance market. Most of the historical research has been done in Anglo-Saxon countries, most importantly the United States and United Kingdom. Anglo-Saxon countries based on common law, are typically characterized by good investor protection, high degree of ownership dispersion and large equity capital markets (Shleifer & Vishny, 1997). Debt holders in these countries typically have a low influence on decision making. The Continental European corporate governance structure based on civil law, typically relies on other actors than dispersed shareholders for corporate control. Corporate governance in these countries is typically characterized by low investor protection, concentrated ownership and substantial influence of debt holders (La Porta, Lopez-de-Silanes & Shleifer 1999). The Netherlands adheres basically the civil law, but it also has been a very open economy since long time and it therefore is also very open to the common law culture. For these reasons The Netherlands is a very interesting environment for research.
The paper is organized as follows. In the second section we provide theoretical background by discussing the relevant corporate governance literature for the insurance industry. In section three, we indicate and discuss the performance measures by which we evaluate insurance companies. In section four we indicate how we expect that the two financial crises are affecting the performance in the Dutch property-liability insurance industry. In the fifth section we present the variables and a brief description of the data. Section six presents the method used to answer our research question. Section seven will provide the results and we end with a conclusion in section eight.
2. Literature review
are referred to as agency conflicts2. The need for governance arises because many of the conflicts of interest that are inherent in all forms of business enterprise cannot be controlled by appropriately designed incentive contracts (Garvey and Swan, 1994). Fama and Jensen (1983) describe that a firm's organizational structure is one of the mechanisms used to control agency conflicts.
In the insurance industry agency conflicts, are not a matter between only the managers and shareholders, but they also involve policyholders, if their future payouts would be lower in order to benefit shareholders. There are two primary sources of agency conflicts in the insurance industry: owner-manager conflicts and owner-policyholder conflicts.
Conflicts between owners and managers arise because managers do not share fully in the residual claim held by owners and have an incentive to behave opportunistically. This conflict can be solved by an increase in leverage (Black and Scholes, 1973). The reduction in equity capital increases the managers’ stake in the firm, which helps to align the interest of owners and managers. Increasing debt also decreases the amount of free cash available form managers to pursue private interests, such as taking on projects that increase the size of the firm but do not maximize its value. Finally, leverage increases the probability of bankruptcy, making value destroying pursuits more costly for managers who lose their jobs and mitigating the owner-manager conflict.
Conflicts between owners and policyholders arise when owners and policyholders3 are separate classes of investors. Owners have a claim to firm value only beyond the claims of policyholders. Therefore, owners have an incentive to exploit policyholder interests by changing the risk structure of the firm or taking actions that increase the value of equity, by decreasing the value of the policyholders’ claim on the firm4. Merton (1974) laid the cornerstones of the modern approach to the valuation of risky debt and equity by describing the equity call option model. The
2
In attempting to control these conflicts agency costs incurred. Agency costs include monitoring expenditures by the principal, bonding expenditures by the agent, and the residual loss. Monitoring is the principal's attempt to control and assess the agent's behavior. Bonding is a form of guarantee made by the agent that he will not harm the principal's interest, or that he will indemnify the principal. The residual loss is the opportunity costs to the principal from the agent's actions which differ from the decisions which would have been made by the principal in the absence of contracting costs (Jensen and Meckling, 1976).
3
A policyholder is similar to a debt holder in the finance literature. The policyholder has a liability claim on the insurance company. Thus, the agency problems between debt holders and owners also exist between policyholders and owners.
4
basic insight underlying this model is that holding a firm's equity is equivalent to holding a call option on the firm's assets. Alternatively, holding risky debt is equivalent to holding risk-free debt and writing a put option on the firm's assets. In this model, firm’s equity are the owners of the insurer and debt holders are the insurer’s policyholders. One of the implications of the option model is that the owners can gain at the expense of the policyholders by increasing the risk of the firm (Cummings et al., 2004). Thus, increases in risk increase the owners share of the value of the firm and decrease the policyholders share. Therefore, the owners prefer risky investments, since policyholders bear much of the consequences of failed investments. Policyholders have an incentive not to increase risk because this increases the chance that their share in the company will be transferred to the debt holders. This problem can be reduced by decreasing leverage, which mitigates expropriation of the debt holders and insolvency risk (Luke, 2002).
The stock form of organizational structure employs the standard corporate form, which establishes different roles for owners, policyholders, and managers. Separation of functions between the roles causes agency conflicts among owners, policyholders, and managers (Lai and Limpaphayom, 2003). The stock company has a comparative advantage in controlling owner– manager conflicts. As discussed earlier, stock companies have alienable ownership claims, facilitating managerial control mechanisms such as proxy fights, performance-related remuneration packages, and hostile takeovers that help reduce inefficient behavior by managers. Besides these comparative advantages in dealing with agency costs between manager and shareholders, the stock company has an additional advantage: it’s superior access to capital. While mutual companies depend on retained earnings as the primary source of new capital, stock companies on the other hand, especially if they are large and have a good track record, can easier raise capital directly in the markets.
valuable method of disciplining inefficient managers in stock companies (Jensen and Ruback
1983).The lack of transferable ownership rights in the mutual organizational structure makes that
it is also impossible for mutual companies to have the threat of hostile takeovers. If the management of a stock company imposes too many costs, someone can assemble a controlling block of shares and change management, thus realizing the capitalized value of the cost reduction (Mayers and Smith, 1988). The only way the owners (policyholders) in mutual companies can
remove management is through a proxy fight, which can be costly and fail to capture the gains5
(Mayers and Smith, 1986). Another way to solve agency conflicts is the use of stock based compensation plans for the managers, such as stock options. This is a very often used to control aspects of the owner manager conflict in stock companies. However, because there are no stocks in the mutual structure, this is not possible in mutual companies.
In the Dutch insurance market mutual and stock companies have coexisted for many decades. Agency theory explains the coexistence of these two organizational forms in terms of their relative success in dealing with specific types of incentive conflicts (Mayers and Smith, 1988). Perhaps the most influential agency theoretic hypothesis about mutual and stock companies is the managerial discretion hypothesis (Mayers and Smith, 1981). Managerial discretion hypothesis, also called efficient structure hypothesis, states that each organizational form has its own characteristics and is sorted in different market segments where they have advantages in minimizing production and agency costs. The hypothesis predicts that stock companies perform better than mutual companies in lines of insurance where managers must be given a relatively large amount of discretion in pricing and underwriting (Mayers and Smith, 1988). Mutual companies, on the other hand, are likely to be more successful in lines6 that require less managerial discretion such as lines where the need for individualized pricing and underwriting is relatively low7.
5
In practice proxy fights for mutual owners (policyholders) are very ineffective, expensive, and rarely employed since the eligible voters in a proxy contest are the mutual's policyholders, and courts have ruled that an insurer's customer list is a proprietary asset that does not have to be disclosed (Mayers and Smith, 1986).
6
The Dutch property liability industry consist of five lines of insurance: (1) accident and health, (2) motor, (3) marine and transport, (4) fire and other property risk and (5) miscellaneous insurance.
7
The hypothesis also states that mutual and stock companies have both comparative advantages in successful controlling agency conflict. The stock companies should be more efficient control the owner-manager conflict, while the mutual organizational form more efficiently controls the owner-policyholder conflict (Mayers and Smith, 1988). Thus, stock companies should be more prevalent in activities in which managers have relatively more opportunities to impose costs on the shareholders, while mutual companies should be more prevalent in activities where shareholders have relatively more opportunities to impose costs on the policyholders. The stock form is likely to have a comparative advantage in these types of lines because of its superior mechanisms for owners to control managers. Although this higher managerial discretion may allow managers to act opportunistically, the various monitoring mechanisms that shareholders can employ, and which mutual owners do not enjoy, help to control the costs of managerial opportunism.
Mutual managers tend to have greater decision authority than do stock managers because of the less effective market for corporate control. Mayers and Smith (1988) predict that the costs of controlling management are significantly higher and the benefits smaller for mutual companies as compared to stock companies8. Consequently they hypothesize that, if the cost of controlling management in mutual insurance companies is higher than in widely held stock firms, then mutual companies should be more prevalent in lines of business where management exercises little discretion. Where managerial discretion is limited, the elimination of the owner-policyholder conflict is likely to give mutuals a comparative advantage over stocks. Also, the mutual organizational form can limit the managerial discretion by concentrating its business in a few lines rather than in many.
The efficient structure hypotheses and the survival of both organizational structures for decades may generate the conclusion that there are no differences in overall performance for both organizational structures in the 21st century. To better understand the differences of mutual and stock companies in comparison with the changing business cycle in the last ten years we have to get deeper into the performance of both organizational structures. Measurement of performance is further explored in the next section.
8
3. The performance of insurance companies
Performance can be defined in different ways. Performance variables can be roughly divided in two sections, accounting performance and performance in the financial market9. In analyzing insurance firms, it is often important to measure their performance relative to other firms in the industry. Traditionally, this has been done using accounting performance ratios. One of the most important ratios is the return on equity (ROE). ROE measures a firm's efficiency in generating profits from every unit of shareholders' equity. We split the ROE into various parts that may be affected differently by the two organizational forms. One way of doing this is to use the DuPont formula (Bodie et al, 2005). The DuPont formula, is a common way to break down ROE into three important components: operating efficiency, asset turnover and financial leverage. The DuPont formula of the return on equity can be specified as follows:
Equity Assets Assets Sales Sales Income Net ROE = * * (1)
Where, operating efficiency is Net income divided by Sales, asset turnover is Sales divided by Assets and financial leverage is measured here as Assets divided by Equity10.
ROE equals by definition the operating efficiency multiplied by asset turnover multiplied by financial leverage. If the operating efficiency increases this will result in a higher overall ROE ceteris paribus. Similarly, a rise in asset turnover, and the other components remain unchanged, results in a higher overall ROE. Finally, increasing financial leverage means that the firm uses more debt relative to equity. Thus, a higher proportion of debt in the company’s capital structure leads to higher ROE ceteris paribus.
Because the focus of this research is on the performance of insurance companies we rewrite the DuPont formula (1) in insurance terms. The DuPont formula of the return of equity of insurance companies can be specified as follow:
Equity Assets Assets emiums emiums Income Net ROE *Pr * Pr = (2) 9
Mutual companies can not be analyzed by financial market ratios since their ownership structure prevent them from having stocks and therefore are not listed on financial markets.
10
Performance of insurance companies in the property-liability insurance sector consist of two components, the performance of the underwriting activities, which is the result on insurance products and the performance of the investment activities, which is the result of the premiums invested until the moment they are paid out as claims. Since we are interested in the impact of the business cycle on the performance of property-liability insurance companies it is important to consider where the business cycle could possibly influence the results on underwriting activities on the one hand, and the influence of the results on investments activities on the other hand. Thus, in assessing the profitability of insurance companies we separate the result on underwriting activities from the results on investments. As a result, we will separate the return on equity (2) in two parts, one for the return on equity for underwriting activities and one for the return on equity for investments activities. This separating of ROE is expressed in equation (3)
ROEa ROEu
ROE = + (3)
Where, ROEu is the return on equity of underwriting activities, ROEa is the return on equity of investment activities and ROE is the combined return on equity of both components.
In order to analyze the performance of the underwriting activities we follow Carrel (1993), who separated the ROEu in two components. The expense ratio, which tells us how efficient an insurance company is in minimizing costs, and the loss ratio, which shows the payout ratio of claims to premiums. The ROEu is expressed in the following equation:
(
)
Equity Assets Assets emiums LR ER ROEu= 1− − *Pr * (4)Where, ER is the expense ratio, which is operating costs divided by premiums11, LR is the loss ratio, which is claims12 plus claims adjustment expenses divided by premiums.
11
Premiums are equal to the net premiums earned in a year adjusted for the change in the unearned premium reserves. Unearned premium reserves are established to account for the fact that premiums are paid in advance but not actually earned without the passage of time. Net premiums earned is adjusted for reinsurance.
12
The performance of investing activities, ROEa is expressed in equation (5) given below:
Equity Assets IRA
ROEa= * (5)
Where, IRA ratio is the investment return to asset ratio, which is investment return divided by total assets.
Equation (4) and (5) combined give us the following equation:
(
)
Equity Assets IRA Equity Assets Assets emiums LR ER ROE= 1− − *Pr * + * (6)In the next section we explain each of the five indicators of ROE, the expense ratio, the loss ratio, premiums to assets ratio, financial leverage and the investment return to assets ratio.
3.1 The expense ratio
To test the performance of both mutual and stock insurers, one of the factors we examine is the efficiency for both organizations structures. The expense ratio is the most common way to do this and is operating costs divided by premiums. The expense preference hypothesis is a corporate governance theory about the incentives to minimizing costs for both organizational structures (Williamson, 1963).
It is important to point out that the long-term coexistence of the two types of organizational structures are not necessarily inconsistent with the mutual companies being less successful than stock companies in minimizing costs. As discussed before, the managerial discretion hypotheses predict that firms with different organizational forms will be sorted into market segments where they have comparative advantages in minimizing production costs and agency costs (Mayers and Smith, 1981). According to this hypothesis, we would not necessarily observe differences in the expense ratio between the mutual insurers and the stock insurers. The expense preference hypothesis, on the other hand, predicts that mutual firms will have a higher costs to premiums ratio than stock firms. Therefore, it would be possible for mutual insurers to be more successful in low managerial discretion or longer-maturity lines of insurance, although mutual managers exhibit expense preference behavior (Cummings et al., 1999).
Another factor that influences the expense ratio is the choice of distribution type for insurance products. There are two mayor distribution types that PLI companies are using (Rejda, 1992). The traditional method consist of independent agents, which can represent more than one insurer. And the so called direct writers option, wherein the sales person is an employee of the insurer. Brokett et al. (2005) find that mutual insurance companies are using the direct writers distribution more than stock insurance companies, which are more using the exclusive agency system. He also come to the conclusion that exclusive agents have higher expenses and charge higher premiums than direct writers. The lower costs and prices of direct writers may place competitive pressure on insurers using the independent agent type, forcing them to accept lower premiums and profit margins.
Previous research finds support for the expense preference hypothesis. Cummins et al. (1999) find that stock insurers have a higher costs to premiums ratio than mutual insurers in the PLI in the U.S. Research by O’Hara (1981) also finds that stock insurers are more costs efficient and profitable. Finally, Verbrugge and Jahera (1981) find that managers of mutual companies have higher personal expenditure in the savings and loan industry in the U.S than managers of the stock companies.
control mechanisms for managers of stock companies we can expect that stock companies are better able to minimize costs than mutual companies, resulting in a higher expense ratio for mutual companies. We can come up with the following hypothesis regarding the efficiency of both organizations structures:
H1,0: The mutual insurers and the stock insurers have similar expense ratios.
H1,1: The mutual insurers have a higher expense ratio compared to the stock insurers.
3.2 The loss ratio
Another important component of the ROE is the loss ratio. The loss ratio is the ratio of claims divided by premiums (Cummings, 1990).
The agency theories imply that mutual companies should be associated with less risky activities than the stock companies. Having less risky activities may lead to a higher loss ratio since insurers have more certainty about claims in the future and therefore are able to hold a higher claims to premiums ratio. Fama and Jensen (1983) agency arguments suggest that mutual companies are characterized by more certain future cash flows. A relative certain future cash flow implies that an insurer can hold less equity and that it can have a higher claims to premiums ratio. Furthermore, Smith and Stutzer (1990) come up with policyholder risk, that is, the mutual insurer should be associated with lower-risk policyholders. Lower-risk policyholders have more certain future claims which may again causes a lower level of excess equity and a higher possible loss ratio. Lamm-Tennant and Starks (1993) observe that the loss ratios of property-liability stock companies exhibit higher variability than those of mutual insurers, which can be explained by the greater complexities of the lines of business that stock companies primarily engage in. This is in line with the managerial discretion hypotheses from Mayers and Smith (1992), which is discussed before.
The theories of Fama and Jensen (1983), Mayers and Smith (1992), and Smith and Stutzer (1990) imply that mutual insurers should be associated with the less risky insurance activities, a more certain cash flow and lower-risk policyholders, all resulting all in a higher loss ratio for the mutual form than for the stock insurer. Therefore, we come up with the following hypotheses regarding the loss ratio:
H2,0: The mutual insurers and the stock insurers have similar loss ratios.
3.3 Premiums to assets ratio
Premiums to asset ratio, often called the asset turnover ratio is another component of the financial statements of a companies performance. It helps us to understand how efficient the company or industry is at generating sales from assets. In other words, how good it is at making money out of what has been invested. The higher this ratio, the smaller the investment required to generate sales revenue and, therefore, higher profitability of the firm. We assume that mutual and stock companies have relatively similar premiums to assets ratio and hence we do not formulate hypotheses regarding the premiums to assets ratio.
3.4 Financial Leverage
Financial leverage as measured by debt to equity ratio13 is expected to have an influence on the performance of a company. As discussed earlier increasing financial leverage means that the firm uses more debt financing relative to equity financing. Interest payments to creditors are tax deductible, but dividend payments to shareholders or premium reduction for policyholders are not. Thus, a higher proportion of debt in the company’s capital structure leads to higher ROEu, ROEa and ROE.14
Agency theory states that the relatively more debt a firm has, the lower the available free cash flow, which reduces exposure to agency problems. As discussed before, Black and Scholes (1973) argues that increasing leverage reduces the agency costs arising from owner-manager conflicts by mitigating the free cash flow problem and increasing the risk of default, making value destroying pursuits dangerous for managers. However, decreasing leverage on the other hand reduces the agency costs related to owner-policyholder conflicts, by increasing the costs of financial distress, and exacerbating risk-shifting problems.
The role of equity in insurance companies is to have the ability to pay claims and to absorb unexpected claims and lower investment results than expected (Guo and Winter, 1997). Equity, in the case of stock insurance companies, is expected to be lower than mutual insurance companies because of stock insurers flexibility in raising capital15. Mutual insurers, however, have limited access to capital markers if their equity level approaches the bankruptcy point (O
13
The DuPont model financial leverage (Assets divided by Equity) is equal to Debt divided by Equity + 1. 14
However, if an insurance company has to much debt, the risk of default arise and the cost of raising external capital increases, resulting in a lower ROEu ,ROEa and ROE
15
hara, 1981). Therefore, mutual insurance companies accumulate capital in profitable years to guard against cash flow problems in the future. Their reluctance to keep the minimal level of equity capital is driven by informational asymmetries that make it difficult to raise external capital in the event of losses are higher than expected or investment returns are lower than expected (Viswanathan and Cummins, 2003). Jensen (1986) finds that there is some evidence that mutual companies have a lower leverage than their stock counterparts. We would thus expect mutual companies to hold more equity in comparison to debt, resulting in a lower leverage ratio than stock companies.
Due the limited access to capital markets for mutual companies we have come up with the following hypotheses:
H3,0: The mutual insurers and the stock insurers have similar financial leverage ratios.
H3,1: The mutual insurers have a lower leverage ratio compared to the stock insurers.
3.5 investment return to asset ratio
To discuss the performance of insurers investing activities the determining component is the investment return to asset ratio (IRA). The investment return is the investment income minus the investment costs in a certain year.
The IRA for the mutual insures is different than that for the stock insurers and can be explained by the earlier discusses managerial discretion hypothesis (Mayers and Smith, 1981). The hypotheses suggest that in mutual insurance companies, policyholders will seek to protect their interest by limiting managerial discretion in investment and financing decisions (Adams 2001). Therefore, mutual insurers are predicted to introduce restrictive mechanisms that promote precautionary investment, such as government securities. In stock insurers, shareholders are tempted to increase their wealth at the expense of the policyholders. They are expected to invest
in more speculative assets.This problem is known as the asset substitution problem in the agency
theory literature. Mayers and Smith (1990) adds to this explanation that in mutual companies, the
funds low and are more likely to undertake risky investment strategies which promise to give them a profitable return in the short term.
We can come up with the following hypotheses regarding the investment return to asset ratio:
H4,0: The mutual insurers and the stock insurers have similar investment return to assets ratios.
H4,1: The mutual insurers have a lower investment return to asset ratio compared to the stock
insurers.
In this section we discussed the measurement of performance of insurance companies by components of the DuPont ROE model (1). The theories used are based on normal market circumstances. However, the aim of our research is to evaluate the whole business cycle of insurance industry in the beginning of the 21st century, which also consisted two economic crisis periods. Hence we need also formulate theories about the performance for both organizational structures in economic crisis periods. Therefore the next section explains the impact of economic crises periods on the performance of insurance companies.
4. The impact of economic crises on the performance of insurance companies
The beginning of the 21st century is characterized by two mayor two economic crises, the internet crisis and the credit crisis. The internet crisis started by mid 2000 with the burst of the dot-com bubble. As a result the stock markets were declining and the real economy experienced a slowdown. The crisis became worsened after the 9-11 terrorist attacks which caused a further collapse of the stock markets. The credit crisis started in 2007 as the sub-prime mortgage crisis in the United States. The effects of this crisis became global in 2008 with the (nearly) collapse of several large international financials16 leading to the current economic downturn.
Literature concerning the possible effects on macroeconomic developments of such economic crises on the performance of property-liability insurance companies is scarce. Grace and Hotchkiss (1995) and Cutler and Ellis (2005) find no significant relationships between
16
macroeconomic variables and underwriting performance of insurance companies. However, Grace and Hotchkiss (2005) expect that insurance companies investment income is assumed to be dependent on the state of the economy. In this section we discuss our view of the impact of the crises to underwriting and investment performance of the property-liability companies.
The two factors which are most likely to change due changing market circumstances are the
premiums and the claims. Economic downturns are generally accompanied by higher
unemployment rates, slicing pay rolls, declining housing demand and a reduction in the demand for durable good. These factors will have a negative effect on the premiums income of the insurers, insurance products will decline and total premiums income will fall. Especially the car, marine and transport lines of insurance will suffer. The weakening economy is taking its effect on vehicle sales and decrease the amount of traffic (Eling and Schmeisen, 2010), in particular in 2008/2009 when the transportation sector suffered from a mayor decline in orders. Also the health-related absenteeism is expected to reduce due the declining labor market. An upset of these declines is also occuring such as the loss of confidence and the increased demand for safety associated with the financial crisis. This loss of confidence tends to be positive for the demand for several insurance products, including those with some form of capital and return guarantee (Schich, 2009). Actual losses and declining confidence typically provide a potent mix for changes in behaviors and in demand for specific types of financial products.
Under periods of economic crisis insurance fraud is expected to increase17 (Schich, 2010). Economic downturns encourage the need felt to commit fraud and could therefore result in relatively higher costs in claims for insurers. For example, according to the Dutch Centraal Bureau of Statistiek (CBS, 2010) in periods of economic crises there is an increase in both the
amount of fires and the total amount of damage of these fires18. The CBS numbers can be found
in table A in the appendices. This increase can be explained by the “in de brand, uit de brand” sentence, which assumes people and companies will claim more when they need to keep an eye on their cash. Overall it is expected that the customers in all lines will be more claim aware when they feel the economic crisis.
17
However, insurance policies specify that an individual can not receive more that his actual loss: By Dutch law a policyholder who over insured is to be indemnified only for the actual amount of the loss.
18
This research focuses on the impact of these economic crises to the performance of the Dutch property-liability insurance market. Therefore, we again discuss the indicators of the ROEu (4) en ROEa (5) and we then indicate what possible changes the economic crises had. We do not expect any difference in financial leverage and the premiums to asset ratio and therefore, the focus in this section is on the expense ratio, the loss ratio and the investment return to assets ratio.
4.1 The expense ratio
As discussed before, the stronger control mechanism in stock insurers and compared to mutual insurers should lead to managers of stock companies to minimize costs more than managers of mutual companies. In periods of economic crises both organizational structures are forced to cost savings. Due to the larger sized stock companies and the fact that mutuals are often selling their insurance policies through direct writers, which are low cost providers, it is expected that stock companies can successfully implement higher cost savings in periods of economic crisis. Therefore, we come up with the following hypotheses:
H5,0: The mutual insurers and the stock insurers have similar expense ratios during periods of economic crises.
H5,1: The mutual insurers have a higher expense ratio compared to the stock insurers during
periods of economic crises.
4.2 The loss ratio
Mutual insurers have less risky insurance activities, a more certain cash flow and lower risk
policyholders, resulting in a lower loss ratio than stock insurers(Fama and Jensen (1983), Mayers
and Smith (1992), Smith and Stutzer (1990). In economic crises periods it is expected that the loss ratio will rise for both organizational forms, because fraud increases and premiums decreases due the economic circumstances.
stock insurers compared to the mutual insurers in periods of economic crises. Therefore, we come up with the following hypotheses about the loss ratio in economic crises periods:
H6,0: The mutual insurers and the stock insurers have similar loss ratios during periods of economic crises.
H6,1: The mutual insurers have a higher loss ratio compared to the stock insurers during periods of economic crises.
4.3 Investment return to asset ratio
According the managerial discretion hypothesis mutual insurers will follow a precautionary investment strategy and stock insurers will follow a more risky investment strategy (Mayers and Smith, 1992). In periods of economic crisis this has an impact on the insurers investment income. Where both organizational structures more likely face losses in their investment return, the more risky investment of stock companies should then lead to a relatively lower return. While, the mutual companies, which hold less risky investment, should face losses but in comparison with stock companies, would do relatively better.
With the different investment strategies in economic crises periods of both organizational structures we can come up with the following hypotheses:
H7,0: The mutual insurers and the stock insurers have similar investment return to assets ratio
during periods of economic crises.
H7,1: The mutual insurers have a higher investment return to assets ratio compared to the stock
5. Data
In the previous sections we discussed the theories about the relationship between organizational structure and performance. Furthermore, we separated the DuPont ROE ratio in a ratio for underwriting performance and a ratio for investment performance and came up with implications for insurance companies in general and more specifically also in economic crises periods. In this section we first discuss the data collection, followed by an explanation of the variables and their predicted signs. Next, we present the descriptive statistics and discuss them. finally a correlation table is included to indicate relationships between the variables.
5.1 Data collection
Our dataset consists of unbalanced panel data19 containing yearly data from 191 property-liability insurers licensed20 in The Netherlands with at least three year records for the period 2000 through 2009. The data used in the panel come from the statistics of individual insurers in the Netherlands published by De Nederlandse Bank (DNB)21. 11 property-liability mutual companies have been
converted (demutualization) to stock companies in the sample period22. These converted insurers
are included in the sample and their organizational structure is noted per year. Companies years
with negative premiums or costs exceeding net premiums are excluded in the sample to eliminate inactive firms. Statistics on health insurance companies were not reported between 2000 and 2006 and therefore excluded from the sample. Statistics on health insurance companies later than 2006 are reported to DNB and thus included in the sample. Table 1 presents the number of companies and average premium for each year in our sample. Mutual insurers are on average premiums
much smaller than stock companies23. The decrease in average premiums in 2004 is a
consequences of the demutualization of Univé Zorg B.A. and Univé Schade B.A., which were the
19
The Dutch property-liability insurance companies used in the sample can be found in table C in the appendices.
20
The supervisory system in the Netherlands changed in 2004. Before 2004, insurers were licensed by the Pensioen and Verzekeringskamer. After the integration of the Pensioen and Verzekeringskamer into the De Nederlandse Bank, De Nederlandse Bank issues licenses to insurers in the Netherlands.
21
We are grateful to De Nederlandse Bank for providing the data in a way that we were able to perform this study.
22
In a demutualization, a mutual insurer converts to a stock insurers, whereby policyholders give up their collective ownership of the firm and a stock company is created. All of the former mutual’ insurance obligations are transferred to this new firm as a result of the demutualization. Eligible policyholders may receive compensation for giving up their ownership rights in the form of shares in the newly created stock company or a compensation in cash. The converted property liability mutual insurers are listed by name in table B in the appendices. McNamara and Rhee (1992) conclude that demutualization does not affect firm performance, as measured by premium income, policy mix, lapse rates, and operating expenses.
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two largest mutual insurers in the sample. Overall, we have 1652 observations over the whole
sample period, 664 in economic crises periods and 988 in non economic crisis periods.
Year Mutual Stock Total Mutual Stock
2000 64 88 152 14,372 107,889 2001 66 89 155 15,660 116,788 2002 67 90 157 17,091 126,864 2003 66 93 159 18,483 133,281 2004 64 96 160 9,343 147,089 2005 66 96 162 9,845 155,501 2006 65 100 165 9,575 151,540 2007 77 113 190 13,577 157,548 2008 74 110 184 15,156 181,943 2009 67 102 169 17,001 192,979
Average Annual Premium per firm Table 1: Dutch Property-liability insurance sector 2000-2009
Number of companies
Notes: Data is obtained from property-liability individual insurance statistics of De Nederlandse Bank (DNB). Statistics on Health insurance between 2000 and 2006 were not reported by the DNB and therefore excluded from this research for the period until 2006. 11 mutual companies were demutualized to stock companies in the sample period. Annual premiums are reported in 1000 euro (€).
5.2 Data variables
Dependent variable
Mutual
Organization structure Crisis periods
Mutual Organization structure
in crisis periods
The expense ratio - -
-The loss ratio + + +
Premiums to assets ratio ± ± ±
Financial leverage - ± ±
Investment result to assets - - +
ROE underwriting performance ± - ±
ROE investing performance - - +
ROE ± - ±
Table 2: Predicted signs of the variables Predicted signs
Notes: Definitions of variables can be found in table Din the appendices.
In order to control for potential influences on firm performance three control variables are included, the variable listed, the variable multiline and the variable size. Although, this research focuses on differences between mutual and stock insurers, it is interesting to investigate differences within the two different types of stock insurers, namely listed and unlisted insurers. There are broadly two ownership structures that stock insurance companies choose from: public ownership and private ownership (Burkart et al., 1999). Public ownership is characterized by a listing on the stock market and having ownership and control among multiple shareholders (dispersed ownership). While, private ownership operates without market listing is characterized by private contracting, typically with concentrated ownership and control among a few large investors.
a lower cost of capital (Kim and Weisbach, 2005). Finally, listed firms have the increased flexibility in designing performance-based compensation plans (Schulze et al., 2001).
Unlisted companies are owned and controlled by single individuals or families. In many cases, owners continue to play a significant direct role in management. Shareholders in unlisted companies are typically restricted to sell their shares in the company (Pagano and Röell, 1998). By definition, the shares of unlisted enterprises are not traded on public equity markets. Furthermore, the sale of shares to the general public in unlisted companies is maybe restricted due to laws and shareholders agreements (Mello and Parsons, 1998). This lack of the ability of selling shares presents shareholders with a significant investment risk. Investors are forced to commit themselves to the company for the longer term. In contrast to the owners of listed companies, they do not have the option of easily selling their shares when they are in disagreement with the company’s strategy or if they believe the company’s activities become too risky. However, the concentrated ownership in unlisted companies give the shareholders stronger incentives to monitoring management in comparison to shareholders of listed companies.
Previous research on listed insurers versus unlisted companies in the insurance industry in terms of performance is fairly scarce. However, Berzins et al. (2008) indicate that unlisted companies do not need to report quarterly earnings, and are not continuously priced. This implies that shareholders of listed companies are able to keep an eye on the results of listed insurers. Managers in their turn choose short term over long term gains to satisfy the shareholders, which may result in destroying value in the long run. Claessens and Tzioumis (2006) find in a study on ownership structures of listed and unlisted companies, that unlisted companies have higher returns on assets and equity compared to what listed companies have. Moreover, unlisted firms are generally smaller than listed companies, who can enjoy economics of scale and scope. (Harris and Raviv, 1991).
Since the listed as well the unlisted ownership structures, have different advantages, we expect that there are no differences in the performance of Dutch stock insurers24.
24
Property-liability companies are active in either one or more insurance lines, the so called multiline and monoline insurers. We control for this factor with theories based on the specialization hypothesis. The specialization hypothesis suggest that firms specializing in fewer lines have some advantages over firms that offer many different lines. This is called the specialization effect. By being active in only one line insurance firms can be more efficient, they can develop more expertise in that line and thereby reduce costs (Jeng & Lai, 2005). Specialization also allows firms to develop efficient operations on both production and cost frontiers and enjoy economies of scale, especially for a relatively small firm (Lieberman, 2009).
Although there are some advantages in specialization, there are also some advantages for firms that do not specialize and write policies over different lines. Multiline insurers may enjoy economies of scope in production and marketing (Comment and Jarrell, 1995). They may also enjoy more stable earnings because of the diversification effect resulting from non-correlated loss experience across different lines. Diversification provides firms with the opportunity to benefit from cost and revenue scope economies. Diversification also generates larger internal capital and labor markets. These internal markets may be more efficient than external capital and labor markets due to information asymmetry between the firm and the external markets (Myers and Majluf, 1984).
In previous research, King (1975) finds that specialized organizations appear to be more technically efficient and possess somewhat greater relative capacity (King 1975). Liebenberg (2009) finds that specialized insurers outperform diversified insurers. Hoyt and Trieschmann (1991) and Tombs and Hoyt (1994) provide similar outcomes. Cummins et al. (1991) estimate the efficiency of specialized and diversified insurers and find that the specialized insurers outperform the diversified ones. Finally, Bikker and Gorter (2010) find in their research on specialization, that stock insurers are significantly more diversified than mutual insurers, which are predominantly active in one or two lines of insurance. For these reasons we expect that multiline insurers outperform monoline insurers in both the overall sample period as in the economic crisis periods.
firms are presented with a wider array of investment opportunities than are smaller firms, which enable those firms to more easily substitute riskier projects for less risky ones. We therefore expect size to be positively related to performance and hence we are controlling ownership structure effects for size.
5.3 Descriptive statistics
Pooled Crises years Non crisis years
Mean Mean Mean Dif ferences p value
Observations 1648 662 986
The expense ratio (ER)
Mutual 0.415 0.415 0.415 0.000 (0.985)
Stock 0.355 0.366 0.348 0.017 (0.337)
Differences p value (0.000) *** (0.024) ** (0.000) ***
The loss ratio (LR)
Mutual 0.531 0.528 0.533 -0.005 (0.851) Stock 0.585 0.589 0.583 0.006 (0.763) Differences p value (0.001) *** (0.021) ** (0.017) ** Mutual 0.054 0.057 0.052 0.004 (0.877) Stock 0.059 0.045 0.069 -0.024 (0.343) Differences p value (0.784) (0.679) (0.508)
Premiums to assets ratio
Mutual 0.393 0.397 0.395 0.002 (0.911)
Stock 0.444 0.462 0.451 0.011 (0.395)
Differences p value (0.002) *** (0.024) ** (0.026) **
Investment results to assets (IRA)
Mutual 0.034 0.030 0.036 -0.005 (0.014)
Stock 0.039 0.037 0.041 -0.004 (0.106)
Differences p value (0.001) *** (0.032) ** (0.004) ***
Financial leverage (LEV)
Mutual 1.418 1.403 1.428 -0.025 (0.597) Stock 1.396 1.398 1.394 0.003 (0.936) Differences p value (0.464) (0.913) (0.364) ROEu Mutual 0.026 0.022 0.028 -0.006 (0.564) Stock 0.027 0.024 0.030 -0.005 (0.561) Differences p value (0.833) (0.850) (0.903) ROEa Mutual 0.034 0.026 0.040 -0.014 (0.000) *** Stock 0.043 0.033 0.050 -0.017 (0.000) *** Differences p value (0.001) *** (0.174) (0.001) *** ROE Mutual 0.060 0.048 0.068 -0.020 (0.069) * Stock 0.071 0.058 0.080 -0.022 (0.023) ** Differences p value (0.143) (0.405) (0.229)
Underwriting results to premiums (ER+LR)
Differences between crisis years and non crisis years Table 3: Descriptive statistics Between Property Liability Mutual and
Stock Companies 2000-2009 in the Netherlands
5.4 Correlation
In this section the correlation coefficients of the variables will be examined. According to Brooks (2008), correlation between two variables measures the degree of a linear association between
them. The correlation matrix is shown in table 4 and has some noteworthy findings25. We discuss
the most important and interesting correlations. The performance indicators show hardly any correlation with each other. This confirms the need to use all performance indicators. We find that there is a positive highly correlation between the ROEu and the ROE (0.917). Also, the ROEu and the ROE are correlated but to a lesser extent (0.275). Since the ROE is build up from both the ROEu and the ROE, this is in line what we expected. The variable crisis effect is negative correlated with ROEa which is understandable, since in economic crises periods the stock markets collapse, resulting in a negative return on return for equity on assets for insurers.
Variables 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Dependent Variables
1.The expense ratio (ER) 1.000
2. The loss ratio (LR) -0.093 1.000
3. Asset turnover ratio (ATR) -0.133 0.080 1.000
4. Financial leverage (LEV) -0.041 0.028 0.020 1.000
5. Investment return to assets ratio (IRA) 0.079 0.055 -0.078 -0.029 1.000 6. Return on Equity on Underwriting
result (ROEu) -0.162 -0.124 0.092 -0.195 -0.008 1.000
7. Return on Equity on Assets (ROEa) 0.000 0.014 -0.035 0.188 0.179 -0.131 1.000
8. Return on Equity (ROE) -0.157 -0.115 0.075 -0.114 0.064 0.917 0.275 1.000
Independent Variables
9. Organizational structure (MUTUAL) 0.050 -0.036 -0.075 0.018 -0.008 0.007 -0.079 -0.024 1.000
10.Crisis effect (CRISIS) -0.003 0.035 0.031 0.002 -0.002 -0.002 -0.131 -0.055 0.004 1.000
Table 4: Correlation matrix of the variables
The correlations described above are not a sufficient condition to establish a causal relationship in either direction. Therefore, the causal relationships of the variables with organizational structure and crisis periods have to be analyzed. The method used to do this is described in the next section.
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6. Methodology
This research deals with the question which organizational structure in the Dutch property-liability insurance market performed better in the first part of the 21st century. We use panel data regressions to examine the performance of mutual and stock insurance companies to come to an answer which organizational structure has done better.
In panel data regressions there are basically two types of information which can be examined. First, there is cross-sectional information expressed in the differences between firms. Secondly, there is time-series information expressed in the changes within firms over time (Brooks, 2008). Panel data regression techniques, such as the fixed effects and random effects models, capture both types of information.
In cases where the number of variables is high, the fixed effects model suffers from a relatively large loss of degrees of freedom. This happens because the model creates a dummy for each explanatory variable in order to obtain the different intercepts among firms. Therefore, the random effects model is preferred over the fixed effects model since degrees of freedom can be saved and thus a more efficient estimation will be reached26. The random effects model can be specified as follows:
it it
it
α
β
xω
γ
= + + ,ω
it =ε
i +υ
it (7)Where
γ
it the dependent variable is theα
is the common intercept,β
is the slope of xit which is the independent variable,ω
it is the composite disturbance term,ε
i is the random variable specifically related to companyi andυ
itis the remaining disturbance.In order to find an answer which organizational structure has done better in the beginning of the 21st century, we use different regression models. First, we start with investigating which organizational structure has done better in the whole sample period. We perform regression
26
analyze on the 8 performance indicators to find answers for hypotheses 1 tot 4. We use the following regression model:
it it it it it i it IS CREDITCRIS ISIS INTERNETCR SIZE MULTILINE LISTED MUTUAL Y
ω
β
β
β
β
β
β
α
+ + + + + + + = 6 5 4 3 2 1 (8)Where, Yit is the observed performance indicator for companyi in year t , MUTUALit is a dummy variable indicating organizational form for companyi in yeart (1 = mutual; 0 = stock),
LISTEDit is a dummy variable indication listed on stock exchange for companyi in yeart (1 =
listed; 0 = unlisted), MULTILINEit is a dummy variable indicating multiline or monoline insurer
for companyi in yeart (1 = active in multi insurance lines; 0 = active in 1 insurance line),
SIZE it is the natural logarithm of the annual total assets for company i in year t and
INTERNETCRISIS and CREDITCRISIS are dummy variables indicating the two different crises period (1 = crisisperiod; 0 = not a crisis period).
Second, we study the performance of the organizational structures in economic crisis periods. We expect that these crises were two different crises. We analyze them separately to find whether the outcomes differ over the two crises. To answer hypotheses 5 to 7, we rewrite equation (8) as follow: it it it it it it it it it i it SIZE MULTILINE IS CREDITCRIS STOCK ISIS INTERNETCR STOCK IS CREDITCRIS MUTUAL ISIS INTERNETCR MUTUAL LISTED MUTUAL Y
ω
β
β
β
β
β
β
β
β
α
+ + + + + + + + + = 8 7 6 5 4 3 2 1 * * * * (9)Where, MUTUAl it *INTERNETCRISIS and MUTUAL it *CREDITCRISIS captures the
differences for the mutual organizational form for companyi in yeart in respectively the Internet
crisis and the credit crisis. STOCKit *INTERNETCRISIS and STOCKit *CREDITCRISIS
Finally, in order to check for robustness for our outcomes, we use equation (9) to investigate the expense ratio and the loss ratio to find differences between lines of insurance27. This may be interesting to do so because the managerial discretion hypotheses (Mayers and Smith, 1988) predicts that the insurance lines differ from each other.
7. Results
This section provides the results of the random regressions models. These results give an answer to our research question. The results of the performance indicators in different market circumstances are discussed below.
7.1 Overall sample period
First, we present the results for equation (8) for the eight performance indicators in table 5. In this regression model we show the combined result of all periods.
None of the coefficients of the performance indicators are significant with respect to the mutual organizational form. We therefore do not find evidence for the expense preference hypothesis (Williamson, 1963), that stock insurers are better in minimizing costs than mutual insurers. Furthermore, we find no evidence that mutual insurers have a lower debt to equity ratio. A lower debt to equity ratio was expected since mutual insurers have limited access to the capital markets and therefore hold more equity to guard against cash flow problems in the future. We expected that mutual policyholders will seek to protect their interest by limiting managerial discretion in investment and financing decisions and therefore have safer investments. Which in turn would result in lower outcomes than stock companies (Adams, 2001). However, we do not find any evidence that mutual insurers have lower investment to assets results than stock insurers. Finally, the insignificant coefficient for the ROE implies that we do not find evidence that there is a relation between organizational structure and ROE.
27
33 Where, Yit are the performance indicators, α is the common intercept, ωit is the composite error term. The variables are defined in table D in the appendices
Variables The expense ratio The loss ratio Asset turnover ratio Financial leverage Investment results to assets ratio Return on Equity on Underwriting result Return on Equity on Assets Return on Equity MUTUAL -0.013 -0.029 -0.037 0.011 -0.001 0.001 -0.005 -0.004 (0.610) (0.343) (0.174) (0.850) (0.547) (0.965) (0.176) (0.762) LISTED 0.066 -0.125 0.001 -0.062 0.008 0.005 0.007 0.015 (0.084) * (0.003) *** (0.982) (0.410) (0.008) *** (0.719) (0.123) (0.358) MULTILINE 0.061 -0.017 0.024 -0.155 0.006 0.007 0.004 0.012 (0.091) * (0.647) (0.653) (0.019) ** (0.013) ** (0.563) (0.259) (0.383) SIZE -0.051 0.041 -0.016 0.052 -0.001 -0.001 0.000 -0.002 (0.000) *** (0.000) *** (0.055) * (0.001) *** (0.274) (0.737) (0.762) (0.599) INTERNETCRISIS 0.023 0.050 0.033 0.053 -0.004 -0.017 -0.011 -0.028 (0.052) * (0.003) *** (0.001) *** (0.091) * (0.029) ** (0.044) ** (0.002) *** (0.001) *** CREDITCRISIS 0.006 -0.043 -0.004 -0.063 -0.004 0.003 -0.019 -0.017 (0.583) (0.007) *** (0.663) (0.037) ** (0.027) ** (0.742) (0.000) *** (0.038) ** Intercept 0.859 0.181 0.590 0.950 0.042 0.035 0.048 0.087 (0.000) *** (0.034) ** (0.000) *** (0.000) *** (0.000) *** (0.266) (0.000) *** (0.009) *** Differences crisis (0.262) (0.000) *** (0.004) *** (0.003) *** (0.965) (0.055) * (0.059) * (0.305) Adjusted R2 0.031 0.024 0.009 0.009 0.014 0.000 0.024 0.005 F-Statistic 9.748 7.669 3.483 3.416 4.893 0.865 7.856 2.500 (0.000) *** (0.000) *** (0.002) *** (0.002) *** (0.000) *** (0.520) (0.000) *** (0.021) ** Observations 1648 1648 1648 1648 1648 1648 1648 1648
Table 5: The relationship between the organizational structure and the performance indicators Panel data least squares regression per line of insurance. Random effects is used as the Hausman test is insignificant.
The regression model is specified as: Yit=α+β1(MUTUAL)+β2(LISTED)+β3(MULTILINE)+β4(SIZE)+β5(INTERNETCRISIS)+β6(CREDITCRISIS)+ωit
34 Table 5 also shows the results of being a listed insurer. The variable “listed” is positively significant with the expense ratio. Therefore we can conclude that listed insurers have a higher costs to premiums ratio than unlisted insurers. The outcomes also show a negatively significant relation at 10% between listed insurers and the loss ratio, which implies that stock insurers who are listed have a lower claims to premiums ratio. This is line with the theory developed. Finally, the relation between listed insurers and the higher investment results to assets ratio is positively significant at 1% for listed stock insurers. This outcome implies that listed insurers are yielding a higher return for their investment activities.
The results in table 5 also show that the coefficient of the multiline variable is positive and significant at 1% with the expense ratio. This implies that multiline insurers have a higher costs to premiums ratio than monoline insurers and this is contrary to the theory that by being active in more insurance lines, insurance companies can be more costs efficient (Comment and Jarrell, 1995). Furthermore, the variable multiline is negative and significant at 1% with financial leverage, which indicate that multiline insurers useless debt financing relative to equity financing than monoline insurers. Finally, we find a positively significant relation at 1% between multiline insurers and the investment results to assets ratio, which implies that insurers active in different lines of insurance yield a better result on investments than insurers active in only one line of insurance.
The results show that the expense ratio is negatively significant related to the variable size as larger sized insurers are better in minimizing costs. This finding is in line with the theory of Cummins et al. (1999), that larger insurers do enjoy economics of scale and scope regarding minimizing costs. Furthermore, size is positively significant with the loss ratio, indicating higher claims to premiums ratios for larger insurers. Finally, financial leverage is positively significant with size, implying that larger insurers have a higher debt to equity ratio.
