Franchise Value, Competition and Insurer Risk Taking

24 Pages Posted: 16 Aug 2008 Last revised: 15 Oct 2012

See all articles by Yayuan Ren

Yayuan Ren

Illinois State University-Department of Finance, Insurance and Law

Joan T. Schmit

University of Wisconsin - Madison - Department of Actuarial Science, Risk Management and Insurance

Date Written: December 10, 2009

Abstract

Existing theory holds that high franchise value (HFV) firms are more prudent than low franchise value (LFV) firms because franchise value cannot be fully liquidated in the event of insolvency. This theory, however, does not consider the opportunity cost to HFV firms of being prudent, especially when confronted with intense competition. We develop a theoretical model in which the risk-constraining effect of franchise value is affected by the degree of competition, and then test it empirically using a sample of publicly traded stock property-casualty insurers. The results suggest that when competition is intense, HFV firms may have sufficient incentive to overcome the risk-constraining effects of franchise value.

Keywords: Franchise Value, Competition, Risk Taking

JEL Classification: G22

Suggested Citation

Ren, Yayuan and Schmit, Joan T., Franchise Value, Competition and Insurer Risk Taking (December 10, 2009). Available at SSRN: https://ssrn.com/abstract=1230422 or http://dx.doi.org/10.2139/ssrn.1230422

Yayuan Ren (Contact Author)

Illinois State University-Department of Finance, Insurance and Law ( email )

Normal, IL
United States

Joan T. Schmit

University of Wisconsin - Madison - Department of Actuarial Science, Risk Management and Insurance ( email )

Madison, WI
United States
608-262-4240 (Phone)

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