On the Demand for Corporate Property Insurance
29 Pages Posted: 17 Sep 1999
Date Written: July 18, 1999
Since changes in the firm-specific or unsystematic risks faced by a corporation have no effect on firm value, corporate insurance purchases would seem unwarranted. However, over 57 percent of insurance premiums are paid by businesses. This apparent contradiction has motivated researchers to suggest factors other than simple risk reduction that create corporate incentives to purchase insurance. This study tests the practical validity of most of the analytic arguments regarding corporate demand for insurance. In general, the empirical evidence from corporate property insurance purchases is consistent with the various theoretical arguments regarding corporate demand for insurance. The results suggest insurance helps reduce various agency costs associated with stakeholder conflicts, provides real services, and reduces taxes. Finally, the less risky nature of the business of regulated industries is believed to lessen the various corporate incentives to purchase property insurance.
JEL Classification: G22, G31, G32
Suggested Citation: Suggested Citation