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Financing and the Demand for Corporate Insurance

Author

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  • Martin F. Grace

    (College of Business Administration, Georgia State University, GA 30303, Atlanta)

  • Michael J. Rebello

    (College of Business Administration, Georgia State University, GA 30303, Atlanta)

Abstract

In this paper we examine the insurance decision of a firm with private information regarding its cash flows and insurable losses. We show that, even in the absence of bankruptcy costs and information production by insurers, the firm's attempts to hedge its information risk can induce it to demand insurance. If higher operating revenues are accompanied by a lower insurance risk, the firm will choose to self-insure. In contrast, if higher operating revenues are accompanied by a higher insurance risk, the firm will demand insurance. In fact, if its insurable losses are relatively small, the firm will fully insure its losses. Further, if there exists considerable uncertainty regarding the firm's insurance risk, the level of coverage demanded by the firm is dependent on its private information, with higher levels of coverage signaling favorable information regarding the firm's future operations. The Geneva Papers on Risk and Insurance Theory (1993) 18, 147–171. doi:10.1007/BF01111467

Suggested Citation

  • Martin F. Grace & Michael J. Rebello, 1993. "Financing and the Demand for Corporate Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 18(2), pages 147-171, December.
    • Handle: RePEc:pal:genrir:v:18:y:1993:i:2:p:147-171
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    Citations

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    Cited by:

    1. Zhang, Chong & Yu, Man & Chen, Jian, 2022. "Signaling quality with return insurance: Theory and empirical evidence," Other publications TiSEM 184da313-a89e-4a81-9f23-c, Tilburg University, School of Economics and Management.
    2. Nizar, Muhammad Afdi, 2016. "Hubungan Asuransi dan Pertumbuhan Ekonomi di Indonesia [Relationship between Insurance and Economic Growth in Indonesia]," MPRA Paper 97928, University Library of Munich, Germany.
    3. Gautam Goswami & Martin Grace & Michael Rebello, 2008. "Experimental evidence on coverage choices and contract prices in the market for corporate insurance," Experimental Economics, Springer;Economic Science Association, vol. 11(1), pages 67-95, March.
    4. Chen, Pei-Fen & Lin, Chun-Wei & Lee, Chien-Chiang, 2019. "Financial crises, globalization, and insurer performance: Some international evidence," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 835-856.
    5. Frederic Loss, 2012. "Optimal Hedging Strategies and Interactions between Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(1), pages 79-129, March.
    6. Peter Haiss & Kjell Sümegi, 2008. "The relationship between insurance and economic growth in Europe: a theoretical and empirical analysis," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 35(4), pages 405-431, September.
    7. Nell, Martin & Richter, Andreas, 2001. "The design of liability rules for highly risky activities: Is strict liability the better solution?," Working Papers on Risk and Insurance 1, University of Hamburg, Institute for Risk and Insurance.
    8. W.N.W Azman‐Saini & Peter Smith, 2011. "Finance And Growth: New Evidence On The Role Of Insurance," South African Journal of Economics, Economic Society of South Africa, vol. 79(2), pages 111-127, June.
    9. Philip Chimobi Omoke, 2011. "Insurance Market Activity and Economic Growth: Evidence from Nigeria," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 1(4), pages 245-253, December.
    10. Guochen Pan & Jingyan Guo & Qiaoling Jing, 2016. "The Relationship between Insurance Industry and Banking Sector in China: Asymmetric Granger Causality Test," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 114-127, June.
    11. Nell, Martin & Richter, Andreas, 2003. "The design of liability rules for highly risky activities--Is strict liability superior when risk allocation matters?," International Review of Law and Economics, Elsevier, vol. 23(1), pages 31-47, March.
    12. Kjell Sümegi & Peter Haiss, 2006. "The Relationship of Insurance and Economic Growth - a Theoretical and Empirical Analysis," EcoMod2006 272100091, EcoMod.
    13. Bruno Jullien & Georges Dionne & Bernard Caillaud, 2000. "Corporate insurance with optimal financial contracting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(1), pages 77-105.
    14. Aunon-Nerin, Daniel & Ehling, Paul, 2008. "Why firms purchase property insurance," Journal of Financial Economics, Elsevier, vol. 90(3), pages 298-312, December.
    15. Liu, Guanchun & He, Lei & Yue, Yiding & Wang, Jiying, 2014. "The linkage between insurance activity and banking credit: Some evidence from dynamic analysis," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 239-265.
    16. Relwendé Sawadogo, 2021. "The relationship between insurance and banking sectors in Sub-Saharan African: Does globalization matter?," Economic Change and Restructuring, Springer, vol. 54(1), pages 101-119, February.
    17. Collier, Benjamin & Skees, Jerry R. & Miranda, Mario J., 2012. "On the Efficient Management of Natural Disaster Risk Using Credit and Index Insurance," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124663, Agricultural and Applied Economics Association.
    18. Zou, Hong & Adams, Mike B., 2006. "The corporate purchase of property insurance: Chinese evidence," Journal of Financial Intermediation, Elsevier, vol. 15(2), pages 165-196, April.
    19. Philip Chimobi Omoke, 2012. "Insurance Market Activity and Economic Growth: Evidence from Nigeria," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 2(2), pages 34-47, April.
    20. Dr. Fentaw Leykun, 2020. "Insurance Market Development, Financial Service Export and Economic Growth: Evidence from East African Countries," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 10(1), pages 57-98.
    21. Park, Min, 2018. "What drives corporate insurance demand? Evidence from directors' and officers' liability insurance in Korea," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 235-257.
    22. Grzegorz Strupczewski & Michal Thlon & Kamil Fijorek, 2016. "Corporate Insurance Versus Risk Retention: An Empirical Analysis of Medium and Large Companies in Poland," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 41(4), pages 626-649, October.
    23. Adams, Mike & Hillier, David, 2000. "The effect of captive insurer formation on stock returns: An empirical test from the UK," Journal of Banking & Finance, Elsevier, vol. 24(11), pages 1787-1807, November.
    24. Simone Krummaker, 2019. "Firm's demand for insurance: An explorative approach," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(3), pages 279-301, September.

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