Risk Management and Performance in Insurance Companies

Eikenhout, L.C.A. (2015) Risk Management and Performance in Insurance Companies.

Abstract:A study in the Netherlands by Laeven & Perotti (2010) has shown that the financial crisis has had a dramatic effect on the insurance industry. The impact of the crisis caused various insurance firms to fail to fulfil financial requirements as stated by the Dutch Central Bank. Willaims et al. (2006) defined risk management in the following way: “Risk management aims to provide decision makers with a systematic approach to coping with risk and uncertainty.” First, there is traditional risk management which focuses on financial risk and manages risks in individual cases. Next, there is enterprise risk management (ERM) which manages the risks as a package. ERM focussus not only on financial risks, but also on non-financial risks. Multiple researches have shown that the implementation of ERM has positive effects on both the performance and the value of a firm (McShane et al., 2011; Hoyt & Liebenberg, 2011; Baxter et al., 2013). The question now rises, whether the effects of the 2007 and 2008 financial crisis could have been alleviated by having implemented enterprise risk management (ERM). This has led to the formulation of the following research question: Does ERM implementation mitigate the effect of the crisis on performance of insurance companies? For this study, the data from annual reports has been collected from 39 Dutch insurance firms, resulting in a sample of 156 firm year observations. The years 2005 – 2008 have been taken into account, 2005 and 2006 are regarded pre-crisis years and the years 2007 and 2008 are the years during the crisis. To find an answer on the research question, both t-tests and regression analysis have been used. The results confirm the decrease in performance during the crisis years. This drop in performance is crucial for investigating the mitigating effect of ERM on performance. No statistically significant evidence has been found to support the positive effects of ERM on performance, both before and during the crisis years. However, results have been found supporting the exact opposite. Statistically significant results also show that firms with a higher ERM implementation level have a lower ROA than firms with a lower ERM implementation level in the pre-crisis period. The combination of these findings results in the following conclusion based on the research question: Very little evidence has been found to support a mitigating effect of ERM implementation on the negative effects on insurance company performance of the crisis.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
Link to this item:http://purl.utwente.nl/essays/66625
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