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- Title
Determinants of Capital Holdings: Evidence from the Canadian Property/Casualty Insurance Industry.
- Authors
Carayannopoulos, Peter; Kelly, Mary
- Abstract
Canadian property/casualty insurers often view statutory capital requirements as excessive, whereas the regulator is more concerned with short and long term capital adequacy. The objective of this paper is to explore the capital holdings of Canadian property/casualty insurers relative to regulatory requirements and firms' risk exposures. In particular, are the levels of reserve capital held by insurers driven by the regulatory regime or are they optimally determined by a firm's exposure to risk? Do legislated capital holdings affect firm profitability? We find that the majority of variables that are relevant predictors of capital holdings of U.S. insurers do not explain holdings of Canadian insurers. Two possible explanations are that either firms determine their capital holdings by adding a margin to the minimum regulatory requirements rather than on the basis of their risk characteristics, or that the Canadian marketplace is significantly different from the U.S. marketplace that these broad risk characteristics do not apply to Canadian firms. Both explanations deserve further study. Furthermore, our study finds no support for the argument that higher capital levels produce lower returns on equity for firms. The most important predictors of a firm's ROE are its investment results and its exposure in the troubled auto insurance markets.
- Publication
Journal of Insurance Regulation, 2004, Vol 23, Issue 2, p45
- ISSN
0736-248X
- Publication type
Academic Journal