Is the Capital Structure Logic of Corporate Finance Applicable to Insurers? Review and Analysis

21 Pages Posted: 29 Jan 2017

See all articles by Jan Dhaene

Jan Dhaene

Katholieke Universiteit Leuven

Cynthia Van Hulle

KU Leuven - Department of Applied Economics

Gunther Wuyts

KU Leuven - University of Leuven

Frederiek Schoubben

KU Leuven; KU Leuven

Wim Schoutens

KU Leuven - Department of Mathematics

Date Written: February 2017

Abstract

Since the financial crisis of 2008, next to banks, insurers have received increasing attention from researchers and regulators because of their crucial role in the financial system. A key point for a stable insurer is its capital structure, i.e. the choice between equity, debt and provisions in financing its operations. Based on earlier work a quickly developing literature has directly applied capital structure theories (in particular trade‐off and pecking order) from corporate finance to insurers’ financing choices. Corporate finance concepts used herein however, are developed for industrial firms. In this paper we provide an overview of the literature on the capital structure of insurers, but contribute by systematically clarifying how to account for the specificities of insurers when transferring the trade‐off and pecking‐order logic from an industrial to an insurer context. This way, we add several new insights on an insurer's choice between equity, financial debt and provisions. In particular, we are able to explain why, as compared to industrial firms, insurers use less financial debt, and why insurers focus so strongly on self‐financing. Finally, we identify multiple avenues for future research.

Keywords: Capital structure, Insurance, Pecking order theory, Trade‐off theory

Suggested Citation

Dhaene, Jan and Van Hulle, Cynthia and Wuyts, Gunther and Schoubben, Frederiek and Schoutens, Wim, Is the Capital Structure Logic of Corporate Finance Applicable to Insurers? Review and Analysis (February 2017). Journal of Economic Surveys, Vol. 31, Issue 1, pp. 169-189, 2017. Available at SSRN: https://ssrn.com/abstract=2907157 or http://dx.doi.org/10.1111/joes.12129

Jan Dhaene (Contact Author)

Katholieke Universiteit Leuven ( email )

Naamsestraat 69
Leuven, 3000
Belgium

Cynthia Van Hulle

KU Leuven - Department of Applied Economics ( email )

Naamsestraat 69
B-3000 Leuven
BELGIUM
32-16-326734 (Phone)
32-16-326732 (Fax)

Gunther Wuyts

KU Leuven - University of Leuven ( email )

KU Leuven - Faculty of Business and Economics
Naamsestraat 69
Leuven, Vlaams-Brabant 3000
Belgium
+3216326731 (Phone)

HOME PAGE: http://www.econ.kuleuven.be/gunther.wuyts

Frederiek Schoubben

KU Leuven ( email )

Naamsestraat 69
B-3000 Leuven, 3000
Belgium

KU Leuven ( email )

FEB
Korte Nieuwstraat 33
Antwerp, 2000
Belgium

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

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