Determinants of Insurers' Reputational Risk

45 Pages Posted: 10 Jan 2013

See all articles by Shinichi Kamiya

Shinichi Kamiya

Nanyang Technological University (NTU) - Nanyang Business School

Joan T. Schmit

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

Marjorie Rosenberg

University of Wisconsin - Madison - School of Medicine and Public Health

Date Written: December 15, 2012

Abstract

Reputational risk has become a critical concern for most organizations. Insurers, who rely on trust to generate business, are particularly vulnerable. Maintaining a positive reputation, however, is costly, leading to the potential for moral hazard in the form of choosing a lowercost strategy that ultimately will underperform relative to consumer expectations. The insurer’s optimal strategy depends on factors affecting the relative costs and benefits of fulfilling consumer expectations, which we test using a rich data set on operational loss risk events. Results indicate that passage of the Sarbanes-Oxley act had a significant effect on firm behavior. We also observe that leverage, firm age, and executive shareholdings are significantly related to reputational risk. In some samples, Tobin’s Q, the level of competition, and the discount rate also were related to instances of reputational loss.

Keywords: reputational risk, moral hazard, operational risk, Sarbanes-Oxley Act

JEL Classification: D81, D82, G22

Suggested Citation

Kamiya, Shinichi and Schmit, Joan T. and Rosenberg, Marjorie, Determinants of Insurers' Reputational Risk (December 15, 2012). Available at SSRN: https://ssrn.com/abstract=2198568 or http://dx.doi.org/10.2139/ssrn.2198568

Shinichi Kamiya

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore, 639798
Singapore

Joan T. Schmit (Contact Author)

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

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

Marjorie Rosenberg

University of Wisconsin - Madison - School of Medicine and Public Health ( email )

Madison, WI 53711
United States

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