Opaque Liabilities, Learning, and the Cost of Equity Capital for Insurers
52 Pages Posted: 4 Dec 2017 Last revised: 21 Mar 2019
Date Written: February 2019
Analyzing the top 100 U.S. property-liability insurers, we find that the cost of equity capital is negatively related to insurers’ underwriting performance, but not their investment performance. The difference is attributable to opaque insurer liabilities and investor learning. We also find that the capital market and product market imperfections are important determinants of insurers’ cost of equity capital. We address endogeneity concerns using property losses from natural disasters as an instrumental variable. Overall, our evidence contributes to the important literature examining insurers’ cost of capital, and it highlights that opaque liabilities are a distinguishing feature of insurers in determining their cost of capital.
Keywords: insurer underwriting performance, cost of equity capital, asset pricing, opacity
JEL Classification: G22, G12, G31
Suggested Citation: Suggested Citation