Get the Balance Right: Growth, Profitability, and Safety in the Insurance Industry
50 Pages Posted: 29 Nov 2017 Last revised: 11 Feb 2020
Date Written: October 28, 2017
In the context of insurance industry, we provide a theoretical and empirical framework to analyze the tradeoffs between three fundamental goals of business: growth, profitability, and safety. Insurers balance on premium and underwriting standards to optimize one goal constrained by the other two. Analyzing 1,988 European insurance companies over eleven years with simultaneous equation models, we show that moderate firm growth increases profitability; however, extremely high growth reduces profitability. In addition, less profitable insurers are more willing to take risks. Our results emphasize the need to jointly consider growth, profitability, and safety in a multi-period context when evaluating firm performance.
Keywords: firm performance, simultaneous equation model, risk taking
JEL Classification: G22, L21
Suggested Citation: Suggested Citation