Does a Persistent Defense Strategy Pay Off? An Analysis of Insurance Company Defense Expenditures

Abstract

Evidence from the property-casualty insurance industry suggests that some insurers tend to settle claims quickly and out of court, while others vigorously defend all claims. While we expect this tendency to vary across lines due to the differential exposures to liability claims, we propose that insurer defense behaviors are not random, but reflect strategies that vary according to market conditions and insured preferences. We consider the extent to which financial and operating characteristics play a differential role for those insurers who select more aggressive or passive defense strategies, and propose that an alignment of insurer and consumer preference is a primary determinant of insurers’ defense strategies. Using insurer defense cost data from 1998-2008, we perform a multi-step analysis to assess the relationships between insurer and market characteristics to defense strategies and assess whether persistence in a particular defense strategy proves to be profitable.

Keywords: defense costs, property-casualty insurance

JEL Classification: G22, l21