Opaque Liabilities, Learning, and the Cost of Equity Capital for Insurers

52 Pages Posted: 4 Dec 2017 Last revised: 21 Mar 2019

See all articles by Chia-Chun Chiang

Chia-Chun Chiang

University of Texas at El Paso - College of Business Administration

Hugh Hoikwang Kim

University of South Carolina, Darla Moore School of Business

Greg Niehaus

University of South Carolina - Darla Moore School of Business

Date Written: February 2019

Abstract

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

Chiang, Chia-Chun and Kim, Hugh Hoikwang and Niehaus, Greg, Opaque Liabilities, Learning, and the Cost of Equity Capital for Insurers (February 2019). Available at SSRN: https://ssrn.com/abstract=3079920 or http://dx.doi.org/10.2139/ssrn.3079920

Chia-Chun Chiang

University of Texas at El Paso - College of Business Administration ( email )

University Library - Acquisitions Department
500 West University Avenue
El Paso, TX 79968
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Hugh Hoikwang Kim (Contact Author)

University of South Carolina, Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States

Greg Niehaus

University of South Carolina - Darla Moore School of Business ( email )

College of Business Administration
Francis M. Hipp Building
Columbia, SC 29208
United States
803-777-7254 (Phone)
803-777-6876 (Fax)

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