Enterprise Risk Management and Diversification Effects for Property and Casualty Insurance Companies
37 Pages Posted: 8 Apr 2014
Date Written: April 8, 2014
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: Suggested Citation