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

30 Pages Posted: 4 Oct 2012

See all articles by Patricia Born

Patricia Born

Florida State University - College of Business; Florida State University - College of Business; Florida State University - College of Law; California State University, Northridge - Department of Finance, Real Estate, & Insurance

Karen Epermanis

Appalachian State University - Finance, Banking & Insurance

Kathleen A. McCullough

Florida State University - College of Business

Date Written: July 22, 2012

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

Suggested Citation

Born, Patricia H. and Born, Patricia H. and Epermanis, Karen and McCullough, Kathleen A., Does a Persistent Defense Strategy Pay Off? An Analysis of Insurance Company Defense Expenditures (July 22, 2012). Available at SSRN: https://ssrn.com/abstract=2156579 or http://dx.doi.org/10.2139/ssrn.2156579

Patricia H. Born

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

Florida State University - College of Law

425 W. Jefferson Street
Tallahassee, FL 32306
United States

California State University, Northridge - Department of Finance, Real Estate, & Insurance ( email )

Northridge, CA 91330-8379
United States

Karen Epermanis

Appalachian State University - Finance, Banking & Insurance ( email )

Boone, NC 28608
United States

Kathleen A. McCullough (Contact Author)

Florida State University - College of Business ( email )

Department of Risk Management and Insurance
150 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-8358 (Phone)
850-644-4077 (Fax)

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