Managing Capital and Insolvency Risk via Internal Capital Market Transactions: The Case of Life Insurers

51 Pages Posted: 26 Apr 2014

See all articles by Greg Niehaus

Greg Niehaus

University of South Carolina - Darla Moore School of Business

Date Written: February 2, 2014

Abstract

Understanding the movement of capital between insurers and affiliated companies under common ownership is important for understanding insurer insolvency risk and the impact of regulatory policies regarding capital standards and group supervision. Aggregate data indicate that life insurers received substantial internal capital contributions from other entities in their group and decreased the internal shareholder dividends paid during the financial crisis. Panel data estimates indicate that, on average, a dollar decrease in net income when net income is negative is associated with a $0.32 increase in capital contributions from other entities in the group, and that a dollar increase in net income when net income is positive is associated with a $0.56 increase in the amount of internal shareholder dividends paid by the insurer to other entities in the group. Also, insurers with low (high) risk-based capital ratios receive more (less) internal capital contributions than other insurers. While the sensitivity of internal capital movements to performance and capitalization is concentrated in groups with a large number of affiliates, insurers in these groups do not on average, holding other factors constant, have lower capital or lower liquidity ratios than insurers in groups with less active internal capital markets.

Keywords: capital, insurance, risk management, internal capital market

JEL Classification: G22, G28, G32

Suggested Citation

Niehaus, Greg, Managing Capital and Insolvency Risk via Internal Capital Market Transactions: The Case of Life Insurers (February 2, 2014). Available at SSRN: https://ssrn.com/abstract=2429024 or http://dx.doi.org/10.2139/ssrn.2429024

Greg Niehaus (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

College of Business Administration
Francis M. Hipp Building
Columbia, SC 29208
United States
803-777-7254 (Phone)
803-777-6876 (Fax)

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