Does Operating Risk Affect Portfolio Risk? Evidence from Insurers' Securities Holding

46 Pages Posted: 16 Dec 2019 Last revised: 23 Feb 2020

See all articles by Xuanjuan Chen

Xuanjuan Chen

Shanghai University of Finance and Economics

Zhenzhen Sun

University of Massachusetts Dartmouth; University of Massachusetts Dartmouth

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

Date Written: October 29, 2019

Abstract

This study empirically examines, in the setting of insurance companies, the hypothesis that investors facing more operating risk may behave as if they were more risk averse in investment decisions. Specifically, we study how operating risk from underwriting insurance policies affects insurers' risk taking behavior in their portfolio investments. We find that insurers with higher volatilities in underwriting incomes and cash flows are more conservative in their financial investment risk -- they have lower credit risk exposure in their bond investments, as well as lower portfolio weights on risky bonds and equities. Further, insurers' portfolio risk exposure is sensitive to the risk of permanent underwriting income shocks but insensitive to the risk of transitory shocks. Transitory operating risk, however, is significantly related to portfolio risk when insurers face tight financing constraints. Our findings suggest a substitutive effect of operating risk on investment decisions by financial institutions.

Keywords: Operating Risk; Investment Risk; Credit Risk, Financing Constraints

JEL Classification: G01; G22

Suggested Citation

Chen, Xuanjuan and Sun, Zhenzhen and Yao, Tong and Yu, Tong, Does Operating Risk Affect Portfolio Risk? Evidence from Insurers' Securities Holding (October 29, 2019). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3495729 or http://dx.doi.org/10.2139/ssrn.3495729

Xuanjuan Chen

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Zhenzhen Sun

University of Massachusetts Dartmouth ( email )

285 Old Westport Road
Dartmouth, MA 02747-2300
United States

University of Massachusetts Dartmouth ( email )

285 Old Westport Road
N Dartmouth, MA 02747-2300
United States

Tong Yao

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Tong Yu (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
4019548606 (Phone)
4019548606 (Fax)

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