Derivatives and Corporate Risk Management: Participation and Volume Decisions in the Insurance Industry

39 Pages Posted: 23 Feb 2015

See all articles by J David Cummins

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department

Stephen D. Smith

(Deceased)

Multiple version iconThere are 2 versions of this paper

Date Written: November 1997

Abstract

In this paper we formulate and test a number of hypotheses regarding insurer participation and volume decisions in derivatives markets. Several specific hypotheses are supported by our analysis. We find evidence consistent with the idea that insurers are motivated to use financial derivatives to hedge the costs of financial distress, interest rate, liquidity, and exchange rate risks. We also find some evidence that insurers use these instruments to hedge embedded options and manage their tax bills. We also find evidence of significant economies of scale in the use of derivatives. Interestingly, we often find that the predetermined variables we employ display opposite signs in the participation and volume regressions. We argue that this result is broadly consistent with the hypothesis that there is also a per unit premium associated with hedging and that, conditional on having risk exposures large enough to warrant participation, firms with a larger appetite for risk will be less willing than average to pay this marginal cost.

Keywords: financial institutions and services, corporate finance and governance, firm objectives, organization and behavior

JEL Classification: G02, G03, L02

Suggested Citation

Cummins, J. David and Phillips, Richard D. and Smith, Stephen Dewitt, Derivatives and Corporate Risk Management: Participation and Volume Decisions in the Insurance Industry (November 1997). FRB Atlanta Working Paper No. 97-12. Available at SSRN: https://ssrn.com/abstract=2561945 or http://dx.doi.org/10.2139/ssrn.2561945

J. David Cummins (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department ( email )

P.O. Box 4036
Atlanta, GA 30303
United States
404-413-7009 (Phone)

HOME PAGE: http://robinson.gsu.edu/profile/richard-d-phillips/

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