Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-06T10:41:55.554Z Has data issue: false hasContentIssue false
  • English
  • Français

Rate Regulation and the Cost of Capital in the Insurance Industry

Published online by Cambridge University Press:  19 October 2009

Robert A. Haugen  and
Charles O. Kroncke
Get access Rights & Permissions [Opens in a new window]

Extract

We have discussed some of the effects of rate regulation in the property and casualty insurance industry. One consequence of the regulatory environment is that an optimal capital structure may clearly exist in this industry. If the rate of return to the insureds is generally deficient, we would expect that property and casualty stock companies would have an incentive to lever themselves to the maximum extent permissible by selling insurance. The classic monopoly of the economic literature finances its lucrative investment opportunities in a competitive capital market. The stock insurance company invests in that market, but the relative distribution of the return earned there may be less than equitable due to the process and standards of rate regulation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 6 , Issue 5 , December 1971 , pp. 1283 - 1305
Copyright
Copyright © School of Business Administration, University of Washington 1971

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Fama, Eugene. “Risk, Return, and Equilibrium: Some Clarifying Comments.” The Journal of Finance, XXIII, March 1968, pp. 29–40.CrossRefGoogle Scholar
[2]Gibsen, William E. “Price Expectations Effects on Interest Rates.” The Journal of Finance, March 1970, p. 19.CrossRefGoogle Scholar
[3]Haugen, Robert A., and Pappas, James L.. “Equilibrium in the Pricing of Capital Assets, Risk Bearing Debt Instruments and the Question of Optimal Capital Structure.” The Journal of Financial and Quantitative Analysis, June 1971.CrossRefGoogle Scholar
[4]Hensley, Roy J. “Economics of Scale in Financial Enterprises.” The Journal of Political Economy, LXVI, October 1958, pp. 389–398.CrossRefGoogle Scholar
[5]Kimball, Spencer L.Essays in Insurance Regulation. Ann Arbor, Mich.: 1966.Google Scholar
[6]Lintner, John. “Security Prices, Risk and Maximal Gains from Diversification.” The Journal of Finance, XIX, December 1965, pp. 587–615.Google Scholar
[7]Lintner, John. “The Valuations of Risk Assets and the Selection of Risk Investments on Stock Portfolios and Capital Budgets.” The Review of Economics and Statistics, XLVII, February 1965, pp. 13–37.CrossRefGoogle Scholar
[8]Magee, John H., and Bickelhaupt, David L.. General Insurance, 7th Edition. Homewood, Ill.: Richard D. Irwin, Inc., 1964.Google Scholar
[9]Magee, John H., and Serbein, Oscar N.. Property and Liability Insurance, 4th Edition. Homewood, Ill.: Richard D. Irwin, Inc., 1967.Google Scholar
[10]Mehr, Robert I., and Cammack, Emerson. Principles of Insurance. Homewood, Ill.: Richard D. Irwin, Inc., 1966.Google Scholar
[11]Mossin, J. “Equilibrium in a Capital Asset Market.” Econometrica, October 1966, pp. 738–783.CrossRefGoogle Scholar
[12]Mowbray, Albert H.; Blanchard, Richard H.; and Williams, C. Arthur Jr.Insurance, 6th Edition. New York: McGraw-Hill Book Company, 1969.Google Scholar
[13]National Association of Insurance Commissioners. Proceedings of the Seventy-Seventh Annual Session of the National Association of Insurance Commissioners. Oklahoma City: Industrial Printing Company, 1946.Google Scholar
[14]Nichols, Donald A. “A Note on Inflation and Common Stock Values.” The Journal of Finance, September 1968, p. 655.CrossRefGoogle Scholar
[15]Plotkin, Irving H. “Rates of Return in the Property and Liability Insurance Industry: A Comparative Analysis.” The Journal of Risk and Insurance, XXXVI, June 1969, pp. 172–200.Google Scholar
[16]Sharpe, William F. “Capital Asset Prices: A Theory of Market Equilibrium Under “Conditions of Risk.” The Journal of Finance, XVIII, September 1964, pp. 425–442.Google Scholar
[17]Sharpe, William F. “Risk Aversion in the Stock Market.” The Journal of Finance, XX, September 1965, pp. 416–422.Google Scholar
[18]Wiesenberger, Arthur, Services. Investment Companies: Mutual Funds and Other Types. New York: Arthur Wiesenberger Services.Google Scholar
[19]Williams, C. Arthur Jr. “Insurer Views on Property and Liability Insurance Rate Regulation.” The Journal of Risk and Insurance, XXVI, June 1969, pp. 217–236.CrossRefGoogle Scholar
[20]Williams, C. Arthur Jr., and Heins, Richard M.. Risk Management and Insurance. New York: McGraw-Hill Book Company, 1964.Google Scholar