Enterprise Risk Management and Diversification Effects for Property and Casualty Insurance Companies

37 Pages Posted: 8 Apr 2014

See all articles by Jing Ai

Jing Ai

University of Hawaii at Manoa - Shidler College of Business

Vickie L. Bajtelsmit

Colorado State University, Fort Collins

Tianyang Wang

Colorado State University - Department of Finance & Real Estate

Date Written: April 8, 2014

Abstract

In a well-designed enterprise risk management (ERM) program, the firm integrates risk management into the strategic planning process, addressing strategic risk, financial risk, operational risk, and hazard risk under a single overarching process. This is particularly important to large financial firms, such as property and casualty (P&C) insurers, which face a diverse set of risks. We find that ERM quality, as measured by S&P ERM ratings from 2006-2012, has a strong positive affect on ROA and Tobin’s Q for P&C insurers. In contrast to previous studies that have found that diversified firms suffer a value discount relative to their more focused peers, the results of this study suggest that, after controlling for ERM quality, business line diversification is associated with a performance premium whereas geographic diversification is not a significant factor.

Keywords: erprise Risk Management (ERM), Diversification Effect, Property and Casualty, Insurance Company Performance

JEL Classification: G13, G14

Suggested Citation

Ai, Jing and Bajtelsmit, Vickie L. and Wang, Tianyang, Enterprise Risk Management and Diversification Effects for Property and Casualty Insurance Companies (April 8, 2014). Available at SSRN: https://ssrn.com/abstract=2422452 or http://dx.doi.org/10.2139/ssrn.2422452

Jing Ai

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States

Vickie L. Bajtelsmit (Contact Author)

Colorado State University, Fort Collins ( email )

Fort Collins, CO 80523-1771
United States

Tianyang Wang

Colorado State University - Department of Finance & Real Estate ( email )

Finance and Real Estate Department
1272 Campus Delivery
Fort Collins, CO 80523
United States

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