Do Insurers Use Internal Capital Markets to Manage Regulatory Scrutiny Risk?

79 Pages Posted: 17 Jan 2023 Last revised: 22 Jun 2023

See all articles by Stephen G. Fier

Stephen G. Fier

University of Mississippi

Andre P. Liebenberg

University of Mississippi

Date Written: June 21, 2023

Abstract

Empirical evidence suggests that insurance groups allocate capital to members with better performance or growth prospects and use internal capital markets to protect franchise value of less capitalized members. We propose and test an additional motivation for the use of internal capital markets – to manage regulatory scrutiny risk. We show that almost 50 percent of insurers at risk of facing additional regulatory scrutiny due to failing four Insurance Regulatory Information System (IRIS) ratios received sufficient internal capital to avoid enhanced regulation. Moreover, the likelihood and extent of internal capital allocation are related to regulatory scrutiny risk and the amount of capital allocated is typically just enough to avoid regulatory scrutiny. Time series evidence indicates that groups manage regulatory scrutiny risk by allocating capital towards affiliates when their pre-capital contribution IRIS ratio failures exceed three, and away from affiliates when they are no longer at risk of additional regulatory scrutiny.

Keywords: Internal capital markets, Property-casualty insurance, Regulation, Regulatory scrutiny risk

JEL Classification: G22, G31, G32, G38, K20

Suggested Citation

Fier, Stephen G. and Liebenberg, Andre P., Do Insurers Use Internal Capital Markets to Manage Regulatory Scrutiny Risk? (June 21, 2023). Available at SSRN: https://ssrn.com/abstract=4324199 or http://dx.doi.org/10.2139/ssrn.4324199

Stephen G. Fier (Contact Author)

University of Mississippi

Oxford, MS 38677
United States

Andre P. Liebenberg

University of Mississippi ( email )

PO Box 3986
Oxford, MS 38677
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
69
Abstract Views
307
Rank
591,696
PlumX Metrics