Get the Balance Right: Growth, Profitability, and Safety in the Insurance Industry

Abstract

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