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

50 Pages Posted: 29 Nov 2017 Last revised: 11 Feb 2020

See all articles by Martin Eling

Martin Eling

University of St. Gallen - Institute of Insurance Economics; University of Saint Gallen - School of Finance (SoF)

Ruo Jia

Department of Risk Management and Insurance, School of Economics, Peking University

Philipp Schaper

University of St. Gallen - School of Finance

Date Written: October 28, 2017

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

Suggested Citation

Eling, Martin and Jia, Ruo and Schaper, Philipp, Get the Balance Right: Growth, Profitability, and Safety in the Insurance Industry (October 28, 2017). Available at SSRN: https://ssrn.com/abstract=3078470 or http://dx.doi.org/10.2139/ssrn.3078470

Martin Eling (Contact Author)

University of St. Gallen - Institute of Insurance Economics ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

University of Saint Gallen - School of Finance (SoF) ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Ruo Jia

Department of Risk Management and Insurance, School of Economics, Peking University ( email )

Yiheyuan Rd. 5
Haidian
Beijing, 100871
China

Philipp Schaper

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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